Whomever's to blame, welcome to the age of the unbundled airplane — a place where you pay for everything from pretzels to pillows; from checked bags to blankets.
"The customer wants rock-bottom prices," says Ray Neidl, aviation analyst for Calyon Securities. "That's what the airlines are offering them. And then for any additional services there's a charge." So far, lavatory access is exempt.
Okay, so we're stretching a point. At most airlines, domestically and abroad, the product remains essentially bundled. But even then, there's been some fraying around the edges of late: Northwest charging extra for aisle seats, AirTran charging for seat selection at certain discount fare levels, and — the latest development — Southwest charging for the ability to board first.
What's at work here, and how far is it likely to spread? BTE asked analysts and airlines alike. What we found is an industry in search — often assiduously — of incremental revenue, money to help offset the nonstop flow of fuel prices.
But we also found an industry that knows when it should say stop.
It is at the same instance one of the most (often unjustifiably) vilified airlines on earth, and one of the most successful. It is, by any gauge, the largest LCC (low-cost carrier) in Europe. Ryanair is remarkable. In 2007, it handled over 40-million passengers. In 2008, projections run to 50 million. It charges for virtually everything. One infamous story has the carrier with the harp on the tail charging £18 for a guy to use a wheelchair.
'Want Fries With That?'
"I'm trying to think of what else they could charge for," says an international airline analyst who asked to remain unnamed. "Ryanair has led the way in charging for what was originally provided for free."
Love it or hate it, Ryanair's example exerts a gravitational pull, one that reaches all the way across the Atlantic to Columbus, Ohio and Fort Lauderdale — the homes, respectively, for Skybus and Spirit. The former offers a set number of $10 seats on every flight. It says it's able to do that because it unbundles the product. Want to check a bag? It's $5 per for the first two. After that, pony up $50. Blankets and pillows? Pay up — but you get to keep 'em after your nap. Skybus doesn't want to do laundry. How 'bout booking a seat? Neat, but don't bother to phone. They don't have a res line. It's all online. As for in-flight entertainment there's always the window seat, or you could bring a book.
You get the drift.
Spirit Airlines does too, contending unbundling — if done right — is good for consumers. "It allows [them] to pay for what they want," says Barry Biffle, the carrier's chief marketing officer. Still, Biffle contends his company's underlying philosophy of unbundling "is completely different" than that of others.
"A lot of people view ancillary products and services as a way to nickel and dime people." He says Spirit's philosophy breaks things down to their basics — the provision of bare-bones, Wal-Martenian passage from Point A to Point B — at the lowest possible fare.
Class & Its Privileges
"If you want to buy your ticket, check-in online, go to the airport and get on the plane, then get off and go about your business, then that's one price," says Biffle. Anything else — checked bags, snacks, soft drinks and so forth — is extra. "We have a multitude of products and services that we offer," he says. "We sell you the pieces that you want."
Even a big front seat.
Don't dare call it business class. Spirit doesn't pretend it is. "It's called 'The Big Front Seat' because that's all it is," he says. Free booze doesn't flow in the front of Spirit's new A319s. Want a beer? $5. A Coke? $3. The seat itself costs as little as $10 extra for, say, a flight from Fort Lauderdale to Orlando; or between $75 to $90 more for a trip down to Lima (Peru, not Ohio).
Passengers like the price, asserts Biffle. Once-upon-a-time Spirit offered business class, with the requisite frills. "The reality is, we weren't very good at it," he says. "Therefore, people didn't want to pay for it." Manage expectations, goes the theory, and you're half way home.
As a result, Biffle believes, "as an LCC, we get our fair share of business travel."
Southwest does too, but it clearly wants more. That's why the-airline-others continue-to-be-judged-by decided to start charging for access to the front of the line. The initiative is called Business Select, and WN introduced it back in November 2007. So far, company figures show "thousands of people per day" pay between $10 and $20 above full walk-up for the privilege of getting on first. Despite tweaking its boarding process so you don't have to loiter around in line holding your place in queue, Southwest's sojourns are still open seating. The carrier reserves as many as 15 slots on each flight for Business Select.
"The thing that it offers them for not much more money," says Southwest PR Director Beth Harbin, "is assurance that they will be one of the first 15 to board." That, a free alcoholic drink and extra Rapid Rewards credit.
But didn't Southwest build its reputation on not charging for other stuff, on keeping the product neatly bundled and predictable? Indeed. And Harbin contends nothing's changed. "We don't want to degrade the customer experience by charging them for things that they already have," she says. "We're not going to charge them for peanuts and pretzels ... for a blanket or a pillow."
"Southwest is quite open about it," says the international airline analyst, "that they're reluctant [to take advantage of] some of these revenue opportunities." The fear: they've kept a loyal customer base for 35 years, and suddenly those travelers are charged for something they've come to expect. Disconnect. Cognitive dissonance run amok. "They're reluctant to go down that route," he says.
No cha ching! creep, not from the airline that loves to LUV you. "The customer experience is still very important to us," says Harbin.
But that doesn't mean future enhancements to that experience won't come with a price. Southwest is looking to begin beta testing in-flight Wi-Fi during the first half of 2008. Harbin says, "there's the potential" that you'll pay for it.
Same with Virgin American, the low-cost new-entrant that is based in San Francisco. "We'll probably have a price point similar to what you would pay at an airport [for Wi-Fi]," says Abby Lunardini, the carrier's director of corporate communications.
Virgin America, like Southwest, insists these kinds of levies don't mark a departure from basic bundling. Lunardini says the concept is not to "ding customers for every single add-on." She says there's a balance between a responsible business plan, and one that's customer-friendly.
The former leaves room for reaping revenues from areas such as in-flight films, in-flight meals and alcohol. The latter entails offering customers a free, fundamentally superior, in-flight entertainment (IFE) system that serves up live television, 3,000 MP3 selections, and intra-airplane chat sessions.
Depending on what airline you talk to, ancillary revenue either goes to lower ticket prices, pay for services rendered, or bolster a bottom line befouled by fuel.
Where Does The Money Go?
"Some airlines claim that when they unbundled the product they actually reduce the ticket price," says the unnamed international airline analyst. "I don't really see that," he laughs. "I think it's just a means of trying to raise the effective ticket price to cover their increasing costs."
Spirit's experience flies in the face of that assessment. Consider, the carrier recently finished a $.32 seat sale. No typo, no hype: thirty-two cents. Biffle is not batty. "The reason I don't worry about that seat going for $.32," he says, is that empty seats don't pay for checked bags, call the res line for $10, purchase a $3 soda, or buy booze. "We had a flight from Fort Lauderdale to Cancun last year where we ran out of [liquor]," says Biffle. On that flight, more than a few passengers had paid $9 for a seat. But the point is, they bought lots of extra stuff. Biffle says while Spirit may average $10 to $25 in non-ticket revenue on a route, it has the opportunity to rake in as much as $65.
That, he argues, is why ancillaries are so significant.
Significant for Spirit.
But perhaps not for the airline industry as a whole. Colorado-based airline consultant Mike Boyd argues ancillary revenue is relatively insignificant, at least the revenue that's realized by US carriers. "The bottom line," he maintains, "is you're not going to get enough ancillary services to pay to dump the lav." A bag here, a bag of peanuts there, "you're not talking about enough money to make a difference." As for Ryanair's tempting template, "this ain't Europe," says Boyd.
Unbundling may have trundled across the Atlantic and taken root in Fort Lauderdale and Columbus, but Boyd doesn't expect the Irish seed to germinate amongst the industry's Redwoods — the Americans, Uniteds, Deltas and Continentals. Sure, they charge extra for in-flight meals and calling the res center. Everybody does these days.
Legacy Firewall?
But unbridled unbundling? Even an airline such as Southwest "would get killed" if it tried it, he contends. Were a legacy carrier to charge extra for checked luggage, "they'd be cut to ribbons," he maintains.
Before coming to Spirit, Barry Biffle ran consumer marketing for US Airways. He viscerally understands, "airlines have taken away things for the past 10 years," things such as food and some frequent flyer benefits, and that "they've taken them away in a big way."
But he believes there's only so far they can go before they alienate their best customers. The international airline analyst agrees. "It's going to be very difficult for the legacy carriers to charge for [checked] bags." He cites his own experience, in traveling one day for business, the next for leisure — and doing it on the same carrier. "It would be very difficult to communicate [that baggage] policy to the customer base."
There is, agree most observers, an expectational firewall of sorts between legacy carriers and LCCs, and also 'twixt the ultra-low fare airlines like Spirit and high-frills low-fares such as Virgin America and JetBlue.
"My guess is that it will be a while before traditional legacy carriers make the jump to charging for checked bags," says Bob McAdoo, senior airline analyst for Avondale Partners. "That's something I don't get the feeling anybody is excited about."
Big Bang From Small Cuts
Inferentially, he appears to agree with Boyd that ancillary revenues matter minimally when it comes to offsetting operating costs. "The real thrust of the legacies right now seems to be on improving economics by shrinking [seat] capacity, to see if they can solve the problem that way."
Southwest is a classic case-in-point. While it's adding 40 new flights to its May schedule, at the same time it's axing a full 57 flight frequencies. The net result: 17 fewer daily departures.
While Southwest trims frequencies by one or two departures per day in such markets as Chicago Midway to St. Louis and Baltimore/Washington to Fort Lauderdale, it's putting on a full-court press in the lee of the Rockies, at Denver. On May 10, WN will start fielding five daily departures from DEN to Los Angeles, two to Philadelphia, one to Raleigh/Durham (RDU), and one to San Antonio, a trio to San Jose, and a similar number of St. Louis.
In reducing flights on routes such as Las Vegas to Chicago Midway, it's able to launch Fort Lauderdale - Austin, Fort Lauderdale - Manchester, Jacksonville - Las Vegas, Nashville - Norfolk, and Oakland - Austin.
Southwest isn't actually eliminating any current route. It's rationalizing its system by shifting assets, its airplanes, to places it thinks it can make the most money. That's where the costs can be cut, fuel conserved, believe Boyd and McAdoo — not by nudging up ancillary income and aggravating passengers.
Expect more capacity cuts over the coming year, onesies and twosies — discrete and not always obvious. That's the way airlines intend to handle cascading fuel prices.
But don't expect them to charge you to use the lav.
Editor's Note: Next month, Jerry Chandler will launch a monthly column tracking the changes in flights and frequencies at individual airports. The column, titled "Airport Monitor," will be accompanied by data to make it easy for travel managers to see where their newest booking and budgeting challenges will occur.
