What Can We Learn From Airline “Unbundling”?

by on Tuesday, August 24th, 2010

Anyone who has flown recently has experienced what the airlines call “unbundling”: separate fees for optional services that used to be bound up in the ticket price. Unbundling means, for example, that a passenger who flies with just a laptop bag will pay less than a passenger who checks baggage in the hold. The passenger who fills up at McDonalds or Starbucks before boarding will pay less than the passenger who wants an airline meal. The economics of unbundling fees for ancillary services have been amply discussed elsewhere: The airlines do well and the passengers … well, it depends.

From the passenger’s perspective, unbundling works best when (1) the service really is optional (i.e, the passenger isn’t coerced to to incur the fee) and (2) the fee itself doesn’t seem like an unreasonable money grab by the airline. Airlines are most likely to be successful unbundling services that a substantial number of passengers either don’t want or need or that they can easily live without or replace on their own.

Suitcases (via Malias - Creative Commons)

Airline food is a perfect candidate for unbundling: It’s easy to get cheaper and better food on the concourse and the airlines no longer forbid passengers from bringing their own on board. Seating is another example. Want a reserved seat? Pay for it. Willing to take your chances on your seatmate? Save your money. Some airlines charge more for seats that are larger or closer to the exit. Worth the extra fee? You decide. These fees are relatively easy to explain to passengers, but airlines on the whole have been lax in communicating with their customers.

Checked baggage fees are also economically defensible, since every piece of checked baggage adds to the fuel required for the trip and thus to the airline’s cost. But airlines are fooling themselves, and doing a disservice to their customers, if they think the economic rationale is self explanatory. While many passengers, especially those on business, don’t check bags and don’t pay the fee, other passengers, especially families, find the policy coercive. One unintended consequence is that passengers have an economic incentive to carry on bags they might otherwise have checked. As the Steven Slater incident reminds us, trying to stuff oversized carry-ons into undersized bins can end badly.

As Bill Hanifin points out, it’s essential that airlines communicate the policy both on the plane and via social media. This is especially important with airline policies that are new, subject to change and may be perceived (rightly or wrongly) as unfair to the passenger. Why are airlines so lax about communicating with their customers? One guess is that there hasn’t been a storm of complaint about most of these fees. But the likely reason for such acquiescence is not consumer satisfaction, but its opposite. As a frequent flyer I hear a lot of grumbling, but most of it sounds more resigned than angry. Many airlines survive consumer dissatisfaction, but only because consumers often have few alternatives and, except for the most egregious service issues, have simply given up. This is the sign of an industry in trouble.

The Zavee takeaway:

  • Communication of any significant business change is essential. Customer dissatisfaction will fill the void if you let it.
  • Don’t assume that customers understand the economics of business decisions that affect them. They aren’t stupid, but economic rationales require explanation.
  • Don’t confuse the absence of complaint for approval. In fact, if you do something that should generate (some) complaints and don’t get them you have a problem that you need to address immediately. Unlike airlines, few small businesses can count on getting away with taking their customers for granted.