Mixed reactions have greeted the announcements of additional fees for airfares over the past year or so. Some industry observers comment that buyers should have the opportunity to purchase only the goods and services that they want. Others mourn the simplicity of the all-inclusive fare.
The latter group needs to get over it. American Airlines’ (AA) announcement that its fare structure will change to à la carte permanently transforms the piecemeal trend into a strategic approach. Airlines have always used trial balloons for pricing. If a single airline announced a price increase and others follows, it was a done deal. If other airlines kept their prices steady, the trial balloon quietly popped. Since fuel prices started to jump, the trial balloons on fees have filled the sky and most have stuck.
AA’s new fare structure will begin in 2009 and be similar to the pricing scheme offered by Air Canada for years.
According to an Oct 6, 2008 Associated Press release, “American Airlines plans à la carte pricing,” Air Canada used this approach to stop market share erosion.
“Executives at Air Canada, which revamped its fare structure and began unbundling five years ago, look down their noses a bit at the actions of their U.S. counterparts, saying a la carte pricing should be about transparency and customer choice, not simply revenue.”
“Air Canada went through bankruptcy earlier this decade, and when it emerged in 2004 it was losing customers to low-cost rival WestJet Airlines Ltd. Air Canada fought back by creating a bare-bones service to compete with WestJet fares, with extra amenities for picking a fancier plan.”
‘We did this in the environment of Air Canada losing market share,’ said Ben Smith, executive vice president at Air Canada. ‘It was about gaining the confidence back from our customers and offering products we thought they wanted.’”
But AA and other traditional carriers need to watch out for rival Southwest Airlines, which has grown its business partially by carefully positioning itself vs. the majors. It touts its all-inclusive fares as a competitive differentiator. Even Southwest; however, is studying the issue of unbundling.
Is your organization and/or industry using the upheaval from skyrocketing oil prices to permanently alter the pricing structure? This action by a major carrier was widely expected given the low profitability of the industry, its highly cyclical business, the huge increases in fuel costs, and increased competitive pressures. Are the winds of change blowing through your industry?