Answer to Question #165367 in Marketing for Saron Gebre

Question

Case

Price Unbundling: An Uncommon Word Leading to Very Nice Financial Returns

Up until 2008, when a person bought an airline ticket, the price of the ticket included all kinds of nice services. Back in the “dark ages” (that is, pre-2008), that airline ticket would have included the ability to check a bag and, depending on the length of the flight, it may have included any or all of the following: a meal, headphones, the ability to store a carry-on in the overhead bin, and as much legroom as everyone else who had not forked over the cost of a first-class or business-class ticket. However, nowadays airlines have discovered the joys of “unbundling.” This practice, which is leading to some hefty extra fees for travelers, is generating revenue for airlines to the tune of $27.1 billion in the most recent period with data available. That number represents a huge increase of nearly 20 percent over the fee revenue generated by airlines the previous year.

 

In a competitive environment in which airlines were faced with high operating costs, intense competition, and a customer base that can compare prices instantly on the many online travel sites, something had to be done that allowed airlines to increase their revenue streams. That “something,” airline executives decided, was to unbundle many of the services customers expected with the purchase of an airline ticket from the price of the fare itself.

 

Think of the many services and nice-to-haves that exist when one travels via air to a particular destination. If you are tall and would like the extra legroom that an emergency exit row may provide, how much are you willing to pay to sit in that row? Some airlines are beginning to charge people an extra fee for not only the exit row seat but also large blocks of other seats near the front of the plane designated by names such as “main cabin extra”—extra meaning a few extra inches of legroom. If you are not checking a bag to avoid the “checked bag fee,” which really kicked off the whole unbundling phenomenon, how confident are you that you can find a space in the overhead bin? Many airlines recognize that the overhead bin space is a piece of real estate that can be rented for a fee. However, since “overhead bin charges” or “carry-on bag charges” are not fully accepted by most air travel customers (yet), airlines have to get creative in how they will monetize that space. Thus, “priority boarding” is invented for an extra fee. Yes, you can now pay an extra fee for priority boarding that virtually guarantees your bag space in the overhead bin. Elect not to pay the fee and you run the risk of the bins being full when you board the plane and having to check your bag at the cabin door.

 

Priority boarding and premium seat location fees are just two of the many fees airlines are now charging. Others include reservation change fees, overweight and oversize bag fees, in-flight meal fees, “stand-by flier” fees, Internet access fees, and 50-percent-more frequent-flier-miles fees, to name a few. All of these fees have proven crucial to airlines realizing operating income in the past few years. In fact, in 2012 airline revenue per passenger exceeded costs by just 37 cents.

That number includes $8.49 per passenger in additional fees. To put it another way, without the additional revenue airlines realized on fees, their costs would have exceeded revenues to the tune of $8.12 per passenger. Clearly, regardless of how passengers feel about paying for services previously included with the price of a ticket, airline fees are here to stay and likely will be expanded in the future.

 

Questions for Consideration

1.    What type of pricing strategies and tactics are airlines using given their base ticket price for the seat plus additional fees for everything else? What other creative additional fees might they charge in the future?

2.    Southwest Airlines prides itself on allowing passengers to check bags for free. Given that virtually all of Southwest’s competitors have started charging these extra fees, do you think it will continue to hold out before it too has to charge extra fees? Why should it? How does the pricing strategy that Southwest Airlines employs differ from that of its competitors and what competitive advantage does Southwest enjoy by not charging extra fees?

3.    What kind of unbundled pricing strategies or fees would you recommend for other service industries like hotels, restaurants, or cruise lines given the relative success of such fees in the air travel industry?

Answer 1

1 Airlines are using dynamic pricing techniques on their tickets and this kind of pricing will remain in the future.

2 The Southwest Airlines will not introduce extra fees to their passengers because if they did so they will lose immense sums of money amounting to Billions of Dollars. many passengers choose Southwest Airlines because of their passenger-friendly policies.

3 I would not recommend the unbundling pricing technique on the hotels, restaurants, and cruise lines because this technique will make services very expensive, and thus they will lose customers.