30 October 2008

Consumers Embracing Airline Charges?

One could infer this conclusion judging by the latest results. Airlines are now (almost) all drinking the coolaid of the Ancillary revenue model. Happy bunnies all, the airlines declare that they have finally found their ability to make money from the business model by resorting to their time honored tradition of pricing obfuscation. Only this time it seems to be working. Better than a fuel surcharge – better than an attempted rate hike. Of course there are even those like Robert Buckman, aviation futurist (say what???) and director of airline distribution strategy for Miami-based Amadeus North America who say that Consumers will eventually embrace unbundled pricing. Let’s just say I think he is speaking out of a non-verbal part of his body.

In this article from Travel Weekly: http://www.travelweekly.com/Article.aspx?id=181492 It can be clearly seen that there is a ton of money to be made by following the formula of hiding the true cost of the service and adding to the cost to the consumer.. Thus new and old airlines are now ALL UPCs – Unbundled Pricing Carriers .

So the impact seems to be really great for the airlines and the Wall Street Analysts. But what of the customer and the other businesses/entities that depend on the business model? How are they going to work/live in this new world? Actually the answer is not so happy but in true Lemming like behavior – it may not matter. The consumers are now finding that they cannot predict the real price of the product they are purchasing. The per passenger model becomes harder to understand. Anyone depending on this (such as taxation authorities) are now seeing their model crumble. In a recent survey conducted by the NBTA - Most of 230 U.S. travel buyers responding to a July-September survey felt that airlines have been "misleading the public with the introduction of new fees." Forty-four percent said "apparent competitive fares end up being higher after all the fees are added." Fewer than 20 percent said airlines are not misleading the public. Clearly the travel managers are unhappy in fact at a session I moderated in LA on GDSs in August at the NBTA national convention, this was indeed a hot topic then.

Behavior of the consumer is not however changing. At least we are not yet seeing perceptible changes in behavior from the passengers as would be indicated in their flocking to those who have reduced or not yet implemented fees. While we can expect some benefit for Southwest who is still hawking their non-fee story – we are not seeing significant growth or share shift to Delta who was not a swift adopter of fees. So it is beginning to look like the airlines have found nirvana and a way to raise revenues without touching market share. Remember that the airlines have not yet rolled back the fuel surcharges to the levels they were at before the price of oil skyrocketed.

So now something needs to be done. Finally – the authorities are going to have to look at this. The numbers are staggering. Upwards of $1 billion per airline can now come from the non passenger ticket revenue. OK This is extreme but I am making a point. Air Canada has perfected an unbundled model. Its revenue goals seem to be modest. Currently generating $73 million as opposed to United’s mammoth $1 billion.

From our point of view this is short term win thinking. It is also going to end in tears despite its popularity. I believe that 2009 we will see several initiatives to curtail the model of unbundled pricing. In no market has this type of behavior ever been successful. Long term we will reach a level of acceptance but be careful what you wish for… it may just happen and you won’t like the results. I predict that a battle will ensue in which certain OTA or Meta Search engines will figure out how to display a true cost of product and that users pick up of this information will eventually force all channels to display true pricing. Further the various government authorities – such as the European Community – will force full true price disclosure. A passenger bill of rights will then appear in the USA. Finally the various local and national bodies who depend on the airlines for taxation type revenue will also force the airlines to start handing over cash with an ancillary revenue tax. Then we shall see equilibrium returning. Personally I hope we get back to full transparency in pricing – but judging from our continued coverage of airlines prices particularly international – I don’t see that happening.


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