More Evidence of HVC and UPC Convergence

Oh creeps... this alphabet soup is getting worse.

For some time I have been speaking of Low Cost and Legacy airlines morphing into HVC - Hybrid Value Carriers. As LCCs mature - many of them seem to fall prey to wanting to become - well Legacy Airlines.

2 Good examples of this are the following:

Mango (South Africa) has just launched its business product - it now offers two packages of products - Mango Flex and Mango Plus. Yes friends - once again the airlines are showing their true colors by well confusing the consumers.

Meanwhile back in the USA - the newly mega-sized Delta has given in to its baser instincts (and profit motive) and adopted Northwest's baggage policy. The numbers are just too compelling to resist. So effective immediately $15 for the first bag and $25 for the second will now apply. Last week when I flew on Delta - I asked one of the CSRs at check in whether they thought charging was a good idea. Her response was - she hoped DL never charged - her colleagues at the other airlines all felt it was counter productive and caused greater customer service hassles and longer times not shorter to process customers. Well so much for that then!

There are hidden costs in the unbundling of the product. UPC airlines I believe will prevail but I still firmly believe that there is a building overhang of unhappy customers, staff and then there is the taxman...

Hmm we shall see - maybe sooner than later

Cheers

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.

Cheers

Is this the Zenith of the US Legacy Carriers?

The French have this wonderful expression Plus Ca Change. Roughly translated it means the more things change the more they stay the same. However we could be seeing the end of the US Traditional Full Service Model, it has passed its zenith and we are headed for a different world.

Here is some interesting backup to this supposition from Anna.aero.

http://www.anna.aero/2008/10/10/the-big6-us-legacy-airlines/?utm_source=anna.aero+newsletter&utm_campaign=a43c266e4c-week_63_October_2008_anna_aero_newsletter&utm_medium=email

Frankly it really does show that there is only one way to go - and that is down.

Interestingly they don't make the connection that I think is likely to happen - namely that now is a great time to think about starting an airline.

We have been approached by several players some funded - some not - who are looking to fill in the gaps where the existing players have pulled out or where the service models just are not working economically.

The Western USA for example is taking the brunt of the withdrawal of United's 737 fleet.

So onward and upward - the new UPC airline revolution is with us. Sadly if there was any nostalgia for the the romance of aviation from a bygone era - it is well and truly now dead.

Cheers

American Introduces A la Carte Pricing

In their exhaustive and never ending search to lower YOUR travel costs - American is happily going to move to a la carte pricing. Thus you too will save money and the airline will be happy to help you pay for all those extras your previously enjoyed at NO CHARGE.

The success of the Tango/Tango Plus model at Air Canada and the extra yields that have come from the LCC's unbundled the cost of the airline ticket is driving AA to this remarkable decision.

So here is the formula:

Full Service Network Carriers - all frills = UPC - Unbundled Pricing Carrier.

Now all airlines can have the same nomenclature and peace is restored to the world.

So no more LCCs FSCs, Network or Legacy carriers, Hybrid (HVCs) or any other type of airline - now everyone is UPC.

Here are 2 articles from yesterday's newspapers on the subject:

http://seattlepi.nwsource.com/business/1310ap_airlines_unbundling.html
http://seattlepi.nwsource.com/business/381854_airfare06.html

(Only read one - they are really the same).

Now there are of course issues here.

1. Government is being hit with a withdrawal of taxes. In the case of United it will be moving $52.5 million of potential tax receipts away from the ATFF.
2. Good luck getting a refund on these new charges
3. Good luck in understanding. One of the articles talks about credit being given for AC illustrating what the customer can do.

So I beg to differ on the issue of ease of understanding. For AC's transparency i submit a display Vancouver to Toronto. For how difficult it is compared to someoneelse's I submit Southwest's display LAX-Houston Hobby.

Same dates - as an experiment try this yourself at home. time yourself on how long it takes you to find the lowest fare on the page and the most expensive fare on the page for each carrier (IN COACH!!!).

It isn't easy... There is a famous quote by the Revenue Management guy at Air Canada who was heard bemoaning his worst problem was there were not enough letters in the alphabet!

So go figure...

This is going to be more obfuscation on airline pricing and more customer confusion, less government revenues and the GDS's dont have a prayer in keeping up.

Result - unhappy campers all round and more loss of airline brand equity.

Just the Professor's humble opinion.

Cheers