American Airline considers a la carte pricing
October 6, 2008 ·
The idea of paying a single, simple fare to fly on an airliner is becoming as quaint as stewardesses in short skirts.
American Airlines is about to accelerate the trend of breaking the cost of a trip into an airfare plus many smaller fees.
Starting next year, American, which led a stampede by U.S. carriers to charge customers for checking even a single suitcase, plans to imitate the a la carte pricing structure pioneered by Air Canada, airline officials say. There are likely to be a few basic fare plans, and travelers can pick additional services — for a fee.
Fans of “unbundling,” as it’s called, say it gives travelers lower base fares with the option of paying for extras that they really want, from beverages to blankets.
Some travelers are wary, however, and suspect the airlines are just trying to chisel them a few bucks at a time.
Phone and cable companies have been using this pricing approach for years to offer extras like premium channels and pay-per-view events. Now airlines see unbundling as a way to boost revenue and defray sky-high prices for jet fuel. In recent months they have added and enlarged charges for fuel, checked baggage, changing flights, upgrading from coach and other services.
There may be no going back to all-inclusive fares, even with the recent decline in fuel prices.
“We as an industry have opted to not just raise (ticket) prices but to raise prices and change the fee structure,” said Daniel Garton, American Airlines’ executive vice president of marketing. Without fees to offset rising costs, “you’re not going to be talking about fees — you’re going to be talking about lost service … being able to have a flight to San Diego,” he said.
UAL Corp.’s United Airlines expects to raise $700 million a year from fees. Northwest Airlines Corp. estimates baggage charges will bring in $150 million to $200 million a year. Continental Airlines Inc. predicts it will generate more than $100 million just from a new $15 fee for checking a single bag — that doesn’t include levies on additional bags.
Airlines have grown more sophisticated at wringing every last dollar out of a flight, partly by lowering and raising fares based on supply and demand. Much of this magic, called “yield management,” is invisible to passengers, but it results in people in the same cabin paying wildly different amounts for the same flight.
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.”
On Air Canada’s Web site, travelers pick from four fare levels. The top tickets, called Latitude and Executive Class, are fully refundable and come with priority check-in, food and other goodies included.
The cheapest fare, called Tango, requires extra fees for upgrades such as a food voucher, advance seat selection, flight changes and airport lounge access. Tango passengers can save another $3 by declining frequent-flier miles or not checking a bag.
“Consumers don’t understand airline pricing, and they certainly don’t understand yield management,” said Peter Belobaba, an expert on airline pricing at MIT. “Air Canada is saying, ‘We’re practicing all those pricing strategies, but at least we’re laying it out for you.’”