What’s in a price? Once upon a time, airline ticket pricing was simple and fixed. There was a small range of available fares for a route, and every so often there’d be a sale fare. When you bought your ticket, you knew what to expect, in terms of baggage allowance and catering on board. But that was in the olden days, before the Low Cost Carriers (LCCs) turned airline strategy on its head. Nowadays air travel is more popular than ever, with far more people travelling than ever before, a growth that’s showing no signs of easing up. And the single biggest catalyst for that growth has been the arrival of the LCCs, offering lower fares that are much cheaper on average than “legacy” carriers. But one way of offering lower fares is to simplify the product, and offer less, a trend that’s now endemic in the industry. And another is to offer an eye-catching low “fare” and then load it up with all kinds of extra charges that are hard – or impossible – to avoid.
The “unbundling” of the airline product has been well underway for several decades now since it was begun by Southwest Airlines in the United States, a pioneer of low air fares through simplified service levels. Airlines around the world have taken this to new lengths, none more aggressively than Ryan air in Europe. Want to bring a checked bag? That’ll cost you. Forgot to print your boarding pass? That’ll be a 40 Euro charge at the airport, please. Would you like to be one of the first on the plane so you can choose a better (non-assigned) seat? There’ll be a charge for that. Many other airlines practice a similar strategy to generate what’s known as “ancillary revenue”, either charging for elements of the basic service that used to be free (such as baggage allowances, or seat assignment) or offering the customer the chance to buy extra options as part of the booking process (such as a bigger baggage allowance, access to an airport lounge, or a rental car at the arrival airport).
Many travellers understand the idea of “unbundling” when it allows them to make their own choices about the components of their journey, while finding lower fares. The key word though is “choices”. The downside of this free-for-all in airline ticket pricing is that many airlines have chosen to show non-optional elements of the price separately, as though the traveller had a choice. Many legacy carriers will show a “fuel surcharge” as a cost element separately from the basic ticket price, even though the passenger has no way to avoid it. Of course fuel is a big part of an airline’s costs, but it’s only one of the factors affecting the price. Other airlines will include a credit card payment fee, but won’t offer any realistic alternative to paying with a credit card.
Airline experts recognize that the “good old days” are a thing of the past. “The Low Cost Carriers have delivered lower fares and have forced airline ticket prices down worldwide,” says one industry consultant. “But unless you’re prepared to pay for long-haul Business Class or First Class, the glamour days of air travel are gone for good.”
Historically airlines have struggled to be profitable, not only because of external factors affecting pricing like fuel prices, 9/11, and SARS, but also because they’ve often tried to win market share by expanding and reducing their ticket prices, only to face bankruptcy or restructuring when the resulting overcapacity pushes them into losses. Such a situation may be good news in the short term for passengers who can find lower fares, but in the long term it’s not sustainable. While ticket prices are affected by the cost of fuel, by carbon emissions taxation, and by a hundred other factors, ultimately it’s about whether the airlines manage to balance supply and demand, and whether they resist the urge to buy more planes to grab market share at the expense of profitability. The industry buzzword for this airline strategy is “capacity discipline”.
What does it mean for the passenger? In stable markets, where airlines have matched their schedules to the demand, there’ll be less volatility in ticket prices. In markets where carriers are fighting for passengers, more competitive pricing will be on offer. Low cost carriers may offer lower fares than legacy carriers – but when all the “hidden extras” are added into the price, that attractively lower fare may not be lower any more. Even newer, more fuel-efficient aircraft, can’t fully compensate for the effects of high fuel prices on air fares. More and more in the airline business, there’s no such thing as a free lunch.