Opinions About a la Carte Pricing

There’s been a lot of back-and-forth lately in the travel media about fee-based ancillary revenue. It’s frequently called an “a la carte” pricing strategy – sell a basic ticket, but charge extra for checked bags, a preferred seat, meals, etc. These being aspects of the travel experience that the airlines now believe are optional.

Some commentators suggest that in many cases the added fees are the only revenues that are keeping some airlines alive. And of course, Europe’s Ryanair has been successful from the beginning with a model that stresses seemingly dirt cheap fares, but the customer pays for EVERYTHING additional – seat selection, baggage, food. It’s gotten so extreme that Ryanair itself had a tongue-in-cheek contest last month asking consumers what they thought the airline should charge for next.

But that’s the Brits, and if you know the Brits, you know that they have different expectations about the travel experience than Americans do. So from a U.S. consumer standpoint, the biggest challenge with varying add-on fees is comparing apples to apples. Only a few new “metasearch” websites are just now beginning to experiment with showing fares plus add-on pricing options.

Our view is that the airlines at some point risk alienating their customers so much that there will be a backlash. But then, unless everyone starts flying Southwest (with their wonderfully transparent pricing and terms), consumers don’t have many options as long as every other major airline is playing the same game. (Of course, domestic dinosaur airlines have been alienating their customers with awful customer service for years now. That culture is so ingrained that it’s hard to conceive of how they can alienate customers even more. Joe Sharkey just posted a great article on that topic.)

So is this an opportunity for one airline to differentiate itself and go back to offering service and amenities all in one package/price? The only current hint of a crack in the armor of the a-la-carte pricing model may be Air Canada. The airline recently booted its CEO, and installed a new boss who publicly claims to be reevaluating the a-la-carte pricing strategy.

Maybe that would be the other way out of this mess – for one of the big airlines to scrap all fees, and become hugely successful as customers rushed to support that airline. Oh, wait, that’s Southwest, isn’t it? And Southwest is expanding aggressively as other airlines are cutting capacity and plunging deeper into unprofitability.

So here’s our only slightly tongue-in-cheek prediction: Five years from now the U.S. will have five dominant airlines – Southwest, JetBlue, Alaska, and two other airlines created from some combination/merger/bankruptcy of the existing five majors (Deltanental? UniCon?). In addition, there will be several new airlines based on the Ryanair and easyJet models (with commodity-level prices and a passel of add-on fees), as well as some existing smaller/regional carriers (such as Spirit, Midwest, AirTran, Allegiant, etc.) that will adopt the no-frills model.

One other possibility is that the U.S. government opens up the domestic airline industry to increased foreign ownership, or allows international carriers to fly within the U.S. Washington seems to be moving toward a governing model that may let some huge businesses fail (GM) or become more foreign owned (Chrysler/Fiat). If the dinosaurs (United, USAir, Continental, American, Delta) are to survive, they may need to shake up their business models by a lot more than adding fees.

Hungry for a great airline meal? That'll be 15 bucks, please.