- Airline consumers are spending tons of money on additional fees for things such as seat selection, checked bags, and meals.
- This is because of a relatively new airline business model where services are “unbundled” from the ticket and sold a la carte.
- Airlines were driven to use unbundling techniques after a variety of changing economic factors affected the industry.
Have you ever noticed how we’re bombarded with fees when buying an airline ticket?
It seems like there’s a charge for everything, whether it’s checking a bag, choosing a seat, ordering a meal, or using overhead space. A ticket can cost one price and then there are a number of other additional fees after that.
While it feels like we’re spending an arm and leg, air travel is statistically cheaper today than it was in the past. Mainly, the negative impressions we have of paying more come from the out of pocket costs that accrue once we begin check-in. And there’s a reason for this. The main culprit for increased-and additional- costs is the concept of unbundling, which only emerged once airlines were forced to create new lines of revenue in the wake of changing economic conditions.
The birth of unbundling
The price of crude oil shot up to $US132 a barrel in the summer of 2008, hitting airlines especially hard. Looking to claw back revenue without raising ticket prices, airlines began the process of unbundling, or separating various costs of services like baggage check, security check, seat assignments, meals, wi-fi use, and early boarding into their own price points.
According to Bob Mann, President of RW Mann & Company, an airline analysis firm with over 40 years of experience in the industry, American Airlines was the first to charge $US20 for a baggage check.
“With that out of the box pretty much everybody else did it,” Mann said. “It was the first big gasp of how to get unbundling started,” Mann said.
Things took off. By 2011, unbundling was embraced by the entire airline industry. What’s more, Mann said these ancillary fees are not subject to the 7.5% Federal Excise Tax, which applies only to domestic airline tickets sold in the U.S. This loophole gives the industry even more reason to charge these fees.
“It gives them a huge incentive to do it,” Mann says, adding that this is not regulated by the Department of Transportation. “You can give away the airfare and then charge everybody for every other element.”
This practice has been especially successful for low-cost carriers. With four major airlines in America – United,Delta, American, and Southwest – controlling more than 80 per cent of the domestic market, smaller airlines like Spirit can offer lower ticket prices but charge multiple fees to make up for the difference.
“Low-cost carriers have a cost advantage versus the legacy carriers (i.e. American, Delta, United),” president of Hamlin Transportation Consulting, George Hamlin told Business Insider. “In order to overcome that (legacy carriers) started to unbundle and created a basic economy fare.”
And there’s no telling if or when the practice of unbundling will cease. Customers appear willing to pay these prices and fees, as 2.5 million people fly every day in and out of U.S. airports.
“The old joke is when are we going to pay to use the toilet?” Hamlin says with laughter. “Right now it looks like unbundling is on the upswing.”
But how did we reach a point where we need to worry about airlines charging us just to use the restroom?
How we got here: Deregulation
First, it’s important to understand how radically different the airline industry used to be. Prior to 1978, air travel was treated as a public utility rather than a business. The Civil Aeronautics Board federally monitored where airlines could fly and what they could charge, leaving carriers to compete on services like seat comfort and food quality.
“Airfares at one point were completely bundled,” Hamlin recalled. “Even hotels were included in it and the food. You paid one price and it was all-inclusive for everything.”
Prices were high, but at least they were consistent. In 1978, President Jimmy Carter signed the Airline Deregulation Act which stripped the CAB of its power. This created a newly free market that spurred the rise of low-cost carriers. It also changed the industry forever by leading to greater consolidation once many legacy airlines failed in the ’80s and ’90s. But a greater change was on the horizon, with the internet increasing in popularity and usage by the mid-1990s.
Cutting out the middle-man
Before the internet existed, if you wanted to book a flight, you’d typically go through travel agencies. These travel agencies used global distribution systems like Amadeus and Sabre to figure out airline routes and prices and make reservations. Airlines themselves would pay a distribution cost to these third parties which brought them, passengers. According to Mann, that all changed in 1996 when the airline companies discovered the internet.
“They all said ‘Hey, this is crazy. We can’t do business like this,'” Mann said. “They said ‘We don’t need an intermediary and we can’t pay for an intermediary.'”
So airlines created a direct system of contact with their customers-websites-where travellers could purchase tickets directly.
“Airlines decided we can one-up this. We can create fare groups that include different kinds of amenities.” Mann said, noting that Air Canada was the first airline to launch fares with different attributes on their own website in 2005. “What enables (unbundling) is technology, specifically, changes in distribution technology.”
By the late 2000s, technology combined with high fuel costs to change airline pricing in a whole new way. And as we move toward the end of the 2010s, it doesn’t appear airlines will cease with the unbundling tactic anytime soon.
“I see it getting more granular over time,” Mann said. “It’s big money.”
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