I’ve Argued for Unbundling, And Now I’ll Argue for Re-Bundling

Last week, I put together a post showing the merits of an unbundled fare structure. In my mind, unbundling was actually just the first step. Now it’s time to re-bundle. Oh, and there should be higher taxes to make that happen more quickly.

After reading that first paragraph, you may wonder if I’ve had a stroke of some sort. Am I really arguing for re-bundling and higher taxes? Yes, but it’s not exactly what you think. I am NOT arguing to return to the fully-bundled fare of the old days. Now that fares have been broken down to their base level, it’s time to start making sense of all these options. It’s time to create new bundles to add value.

In its purest sense, this means offering several types of fares that include different things. Air Canada was one of the pioneers in this effort many years ago. I actually first wrote about that in the very early days of this blog back in November 2006. The airline has five fare categories that bundle a variety of things together. I love it so much that I’ll paste the entire product description here:

Air Canada Fare Families

This model is a great way to do things. You still benefit from the basic idea of unbundling in that people have to want to pay more to get more. But instead of a Cheesecake Factory-like menu with a million confusing options, the airline goes fast food-style and creates value meals.

The Benefits of Re-Bundling
The customer benefit is that it greatly simplifies the process and makes it easier to understand. It also makes rational sense to people who buy tickets. Travelers have complained for ages that airfare makes no sense. Why is someone paying $200 sitting next to someone who pays $1000 and both get the same thing? This model creates tangible differences that help explain the difference in fare. And it works. This is an old presentation, but 45 percent of Air Canada customers bought up to a higher fare back then and I know the number remains lofty today.

The beauty of this model is that the airlines benefit as well. The idea is that airlines can get you to pay more for a bundle of things than you would if you just paid for each one individually. Look at the difference between Tango and Flex fares. With Flex, you get a reduced same day change fee, you earn full mileage for the flights, and you can reserve a seat in advance. Of those, the advance seat assignment is probably the most desirable. If that costs $18, then you can price this whole package at $25.

What happens is people default to the bundle since it’s front and center. But even if they do their homework and compare to buying it a la carte, they’ll still often say, “well, it’s not that much more to earn full miles and just buy the bundle, so I’ll just do it.” The airline makes more money, if it’s priced correctly.

I should note that I’m not arguing for the cable company-style service which Gary Leff addresses. In that case, you have no choice but to choose a bundle. There is no a la carte offering. That has been a big fight in that industry, and I hope that the airlines don’t go in the same direction. I like the idea of offering the bundle up front but still making individual purchases possible after. When you’re talking about one-off purchases like air travel, it provides more revenue opportunity than it would in a cable-style situation where there’s a long term subscription at stake.

Why Isn’t This More Widespread?
So if this can make more money, why aren’t we seeing it in the US? Well, we are. Frontier, fresh with former Air Canada execs, adopted fare families awhile ago. And late last year, American introduced a limited set of options as well. But there are a couple of reasons why this isn’t more widespread.

Most importantly, tax policy is preventing this from happening. Internationally, it makes no difference. But for domestic travel, fares are taxed at 7.5 percent while fees are not taxed. So why would you create fare families when you’ll have to pay a 7.5 percent penalty on everything? (I still can’t figure out why American was willing to take that hit.) It makes no sense, so airlines are better off sticking with fees and doing this re-bundling thing half-assed.

Delta for example, has a “Lift” package which combines priority boarding with a 1,000 mile bonus. There’s also an “Ascend” package which includes priority boarding and wifi. But those are still add-ons after the fact and not part of the fare. And really, it shouldn’t be until ancillaries are taxed. Yes, I think that if the fare is subject to a 7.5 percent tax, then optional items should be as well.

The other issue is that the only place that these bundles can really be implemented properly today is on the airline website. Online travel agents have failed to really provide any of this to people who are searching. Traditional travel agents can, but the technology they use makes it difficult to book. (I’m talking about in the US. Go to Canada and there are amazing agent tools, like Travelport’s Agencia.) So airlines may look at their scarce development resources and decide that this isn’t a priority. But I tend to think the tax issue is probably a bigger one.

Eventually, we’ll get to a point where airlines begin to offer bundles across the board, and that will make shopping easier for people. Of course, these bundles won’t be standardized across airlines, so naturally, critics will find plenty to complain about, as always. But to get to that point, we need to have fees taxed like fares first.

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