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.

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

  1. SEAN says:

    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.

    I don’t know if it was intended, but that was a great line regarding The Cheesecake Factory. The cable-TV moddle has it’s own numerous & often confusing aray of bundles & deals witch also seme to change by the day. Just as a footnote, cable providers haven’t excepted the idea of ala cart pricing as they would lose money since most people watch only a handful of stations to begin with.

  2. Sally Blue says:

    I found the chart interesting, because the change fees are not what I am used to with Air Canada. On U.S. flights it’s a $200 across all non-refundable categories but in Canada it’s $150 at most, and $100 on Flex and Exec Lowest. On Sun Destinations its $150 across all segments and on other overseas it varies.

    Baggage policy also varies by segment as well, with first bags being complimentary on all segments except the U.S. Air Canada matches down to the U.S. carrier because that’s the competitive environment in which it is operating.

    While I agree in principle with your earlier comments on bundling, you can’t disregard the unintended consequences. The baggage fees have led to a lot more people carrying bags on board, which increases pressure on screening check-points, makes boarding and deplaning less efficient — putting pressure on on-time performance and aggravating many more people — and increases flight crew workload.

    • Sean S. says:

      I would love to see the impact on boarding and on-time departure that having such a large amount of carry on’s has produced. Anecdotally I would argue yes, it has negatively impacted on time departures, but I would love to see actual data examining the impact.

      I think a honest large part of people’s frustration comes from the boarding process which makes people feel as if they’re in a cattle car. Honestly calling by rows, and differentiating prices by row (rows nearer the front, which are already Economy plus type arrangements on alot of airlines). That way the zone’s actually make sense and there isn’t this kind of rush.

    • Shane says:

      The shift of consumers to carry-ons also shifts workload from airline baggage handlers to increased need for personnel at security check-points. So not only are the airlines benefitting by tax-free bag fees, the government (ie: the rest of us) pay for additional security screening lines to accommodate the airlines’ policies.

      • Sean S. says:

        Yes and no. Checked bags still need to be screened, but yes, the larger amount of people with carry on’s who gum up the works MAY mean that more TSA screeners need to be hired to deal with the volume. A large part of the problem is people simply aren’t efficient for the high volume that is an airport. I work in a small rural town where checkout lines are a place to catch up on personal matters, and a small number of items results in a 5 minute line wait. You throw enough of those people into a TSA line with that type of mentality, and you have chaos.

        Another big thing, and one I’m not surprised by the unions pointing this out, is the sheer number of times that FA’s have to place people’s bags simply because they are slouches or are gumming up the works. I’d be damned if I was an FA if I would place someone’s 50lb alleged roll aboard up for them because they can’t be bothered to check things in properly.

    • CF says:

      Sally Blue – I agree that bag fees have an impact elsewhere in the system, but they must have done the math and decided it was clearly worth it. Otherwise they wouldn’t have done it.

      Of course, this can always be fixed the Spirit-way – just add carry on bag fees as well. (So far, that seems to be a line the legacies won’t cross. So far.)

      • Sally Blue says:

        The “math” doesn’t include the added weight on TSA or — in Canada — CATSA. This may cost the air carrier nothing, but costs travellers and the tax payer significantly.

  3. MeanMeosh says:

    “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.)”

    Pure speculation on my part, but I have to imagine that the bean counters ran the numbers and decided that even with 7.5% skimmed off the top, the overall addition to the bottom line from passengers buying the bundles would still be more than the revenue generated by selling the various components of the bundles individually. I’d have to imagine that the services included in the bundle represent pretty much pure profit to AA, so if they are able to get someone to buy one of the packages, even 92.5% of the upsell is still better than zero. It’s also possible that the extra charge, for example, the $68 for the “Choice” package, is internally accounted for as a separate fee and not part of the fare, thus excluding it from the excise tax.

    • CF says:

      MeanMeosh – Your speculation could be right, but I can confirm that the fares are filed this way so the tax does apply. It isn’t broken out in some separate bundled fee somehow.

  4. That AC chart just confused the average once in awhile traveler. They still want the lowest fare I’m assuming and chose that way. It’s the people who travel off and on but not business travelers who may start going with higher fares/options to make things easier when they do travel.

  5. To me, this seems like the obvious way to go in the future.

  6. Jay F. says:

    Most Asian carriers have followed this pricing model for years. Consistently, they are the most profitable in the industry. Paying the lowest fare means you’ll be the last person to be re-booked in case of cancellation or delay.

    The problem with US carriers is that fees are being used to cover for foolish decisions. The 20-30 years old aircraft burn significantly more fuel than newer models. Offering frequent flier miles to all fares. Investing in expensive lie-flats, but no increased staffing of premium cabins to attract the profitable business traveler with consistent dedicated to details service. Meals that no Asian carrier would consider fit for 8-hours plus travel. Finally, the extent of free travel vouchers is ridiculously insane. I stopped flying US carriers internationally after observing how consistently “buddy pass” holders filled every seat remaining in the plane. Not an issue on a domestic 1-5 hour flight, but a major flight experience issue in long hauls.

    Fees do not make sense if all areas of cost are not controlled and addressed properly. A penny wise, a pound foolish.

    • Shane says:

      Of course it doesn’t hurt that the Asian carriers (and middle-East carriers for that matter) can have much lower labor rates.

      • Sean S. says:

        Not just labor rates. But labor rules. While it varies, in many Middle Eastern countries there are not unions allowed. Discrimination law, in the sense of firing FA’s simply for not looking right, don’t exist. And probably most importantly of all, for women in those labor forces there is limited job prospects outside of sex segregated job roles, which FA’s are often categorized as. When you have a captive pool of people who can’t assert themselves in the workplace, can be fired if they don’t meet arbritary standards of beauty, and no where else to go, you kind of get your pick of the litter.

  7. ABC says:

    Certain optional items are taxed, such as seat upgrades.

    http://www.gao.gov/new.items/d10785.pdf
    See page 22.

  8. JayB says:

    Wonderful stuff for bloggers and commenters. But…!

    What is it we are trying to buy from the airlines. I would prefer if it were just simplified as to: “Dear airline, how much are you charging to fly me from Podunk to Possum Hollow?” Show me the price, for what will get me to my destination. Anything else, nice, like ticket changeability, refunds, frequent flier miles, seat selectability, or inclusion of some special travel assistance, but they shouldn’t be part of the basic price, unless clearly stipulated as something included in that air carrier’s definition of “transportation service” without additional charge.

    Of course, there is baggage. Baggage is something to be transported and certainly is something that can be included in the basic price or charged additionaly. Baggage is defined in UA’s 46-page contract of carriage as:

    “…such reasonable articles, effects and other personal property of a ticketed Passenger as are reasonably necessary or appropriate for the wear, use, comfort or convenience of the Passenger in connection with the Passenger’s trip.” (OK, does everyone understand every word of that?)

    I always thought of baggage as being part of the basic transportation service. I’m willing to think it may no longer be. Just treat all baggage the same, wherever it is stored. Is there really a difference in cost, considering all parties, between carry-ons and checked baggage?

    In the end, airlines can charge however they want to. Customers be damned, and they are!

    • CF says:

      JayB – The vision in the future is that you’ll be able to store your preferences with the airline or with a third party and then have all rates returned include what you want to see each time. You could tweak as needed and purchase all at once. Now if only all the various distribution methods would stop fighting each other so this could happen…

  9. CZBB says:

    I’m sad to see Cranky glorifying Air Canada; an airline who’s fees include fuel surcharges so high that on transatlantic travel it exceeds the airlines’ total per-seat fuel costs.

    Airlines charge all these ‘fees’ to:
    avoid taxes (not payable on fees),
    commissions (not payable on fees),
    reduce value in frequent flier programs (oh yes, 3/4 of the ticket price is fuel surcharge you still need to pay),
    and to cheat customers out of federally mandated compensation “Oh that VDB credit you have isn’t good toward the ‘fool surcharge'”.

    It’s only a matter of time until they really get slapped with false advertising and collusion.

    • Sally Blue says:

      Do you even know what collusion means? Collusion is when two competitors conspire to do something, such as to fix a price. Your comment vis a vis Air Canada and collusion makes no sense. As for false advertising, under current regulations air carriers in Canada are required to advertise prices with all taxes and fees included so your comments are baseless there also.

  10. Mark says:

    I like this approach. Also, it would create a structure where the airlines could create a fare category targeted at corporate travelers with lower change and baggage fees at a small increase over a non-negotiated fare in return for a certain guaranteed buy.

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