More unbundled service
fees, reduced fares in offing
By Michael Fabey
Two key factors will dominate the
balance sheets of airlines in 2009:
a la carte pricing and discounted
The first is a direct result of the 2008 run-up in fuel costs, which all but forced desperate carriers to bolster their coffers by squeezing every
possible cent from each passenger.
The latter is being driven by a continuing drop in air
travel unprecedented except for the period immediately
following 9/11. For November alone, ARC reported that
air sales plummeted more than 20%.
All major airlines except renegade Southwest are going to be doing more unbundling and charging for additional services in the coming year.
Alaska Airlines Vice President Brandon Pederson told
investors in New York in December, “These ancillary
revenues … have become the Holy Grail.”
But as a la carte fees mount, so does the chorus for
transparency and accountability about what air travel
On whichever side of the issue you happen to fall,
unbundling represents a paradigm shift in air travel
that will gather even greater momentum in the coming
“We may be looking at an unprecedented change in
the way airlines will retail their products and services,
which has essentially been the same since they began
selling tickets decades ago,” said Robert Buckman, director of airline distribution strategy at Amadeus.
“With ancillary services, the shopping cycle is extended beyond the day the ticket is sold,” he said. “It extends
from day of sale to completion of travel.”
That extension works the other way, as well: It starts
when the ticket searches begin, when passengers or
others arranging flights decide which portals to use to
book the tickets, whether to lock in an aisle or window
seat and so on.
Indeed, Air Tran found that customers are willing to
pay an extra $6 fee to guarantee seating assignments
while booking on the airline’s website, and the airline
expects to raise up to $30 million annually from those
fees alone. That’s on top of an additional $50 million
to $100 million in incremental revenue for checked-bag
American estimates it will generate “hundreds of millions of dollars” from the extra fees, while Delta expects
to make $1 billion from them.
After being pressed on that $1 billion number by
analysts in a fall conference call, Edward Bastian, then
Delta president and CFO and now CEO of Delta’s new
subsidiary, Northwest, acknowledged that the figure
was not incremental but included some fees Delta was
Nevertheless, the new fees are adding up.
“When you look at our other net revenue line, which
is where the fees come into, that line is growing at about
a 25% clip year over year in the September quarter,”
Bastian said. “I expect on a go-forward basis, looking
into 2009 as opposed to just the fourth quarter, we are
going to continue to see those relative double-digit clips
from where we are in 2008.”
Pinpointing airline revenues — and customers’ costs
— has been problematic. And that’s not sitting well
with some lawmakers in Washington.
U.S. Senator Robert Menendez (D-N.J.) recently introduced legislation to require airlines to post up front
the amount of each tax and surcharge that accompanies
a ticket, as well as additional fees that might apply.
“Extra costs and surcharges should be plain to see
and easy to figure out,” Menendez said. “Surcharges
shouldn’t be arbitrary; they should correlate to an actual cost for the airline.”
Airlines argue that passengers get that kind of transparency on the carriers’ websites. But that’s clearly not
the case for all carriers, and there is no way yet for third-party distributors to calculate and compare those fees
for their customers.
Such comparisons should be available by the end of
2009, said Amadeus’s Buckman.
Both Amadeus and Sabre are on track to offer such
capabilities in 2009.
But first, Buckman said, the industry needs to develop standards for the fees and for website presentations
of the fees.
That, he said, should happen in the early part of 2009
and is something for which the airlines themselves are
The carriers, he said, see the potential for unbundling and rebun-dling revenue-making packages.
Discounting sounds a more
sour note. As 2008 ends, industry watchers report an abundance
of air ticket discounts and other
deals, with a prediction of more of
the same for 2009.
But a closer look shows that airlines had folded fuel surcharges
into their base ticket costs in the
summer and early fall, and once
the carriers pulled back on those
surcharges, it appeared that the
overall price was dropping.
Also, that base rate failed to reflect the a la carte fees from unbundled products and services.
Despite the drop in fuel prices
— and thanks in no small part
to the double-digit capacity cuts
across the industry — airline executives have assured Wall Street
that the carriers plan to maintain
their fare base.
Airplanes taxi on the tarmac. A drop in air travel in 2008 drove the trend of discounted fares; a run-up in fuel costs earlier this year was directly responsible for a move towards a la carte pricing.