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An article in the New Yorker last year alleged that airlines have adopted a strategy of ‘calculated misery’ in order to encourage customers to pay extra fees. The argument is that the basic service provided is designed to be so degrading that passengers are willing to pay extra for services such as priority boarding and premium seating just to avoid the discomfort of an economy service.
It is certainly true that there is a growing trend towards ‘unbundled’ airfares. Historically, a standard airfare included a choice of seats, a meal on-board and an allowance for checked-in luggage. Now, many airlines offer a basic ticket that excludes many of these services with the option for passengers to purchase add-ons to improve the comfort of their journey. In 2014 alone, global airline ancillary revenues were reported to be over $38 billion.
This has two aspects that are curious.
First, lower fares clearly grew the market, in ways that were not anticipated by many of the legacy carriers. By offering a no-frills service airlines are able to attract passengers who could not afford to fly otherwise. It is no coincidence that since the emergence of low-costs carriers in the mid 1990s the number of passengers carried in the European Union has increased by over 200%. Surely this is a good thing?
Second, given the New Yorker’s allegations come at a time when US airlines are making record profits, does this imply that the prices being charged for the add-ons are higher than when everything was bundled? Or does it suggest that, by charging add-on fees to discourage passengers from checking-in bags or themselves at the airport, airlines have been able to significantly reduce their cost bases (as claimed by the likes of Ryanair)?
The decision by airlines to unbundle airfares is probably a good indicator of a healthy competitive environment. Traditional carriers are being forced to reconsider their business models in order to attract passengers away from low-cost carriers. Meanwhile, relatively new entrants like JetBlue, who once boasted that its fares included a checked luggage allowance, are being forced to copy the big boys.
The popularity of low-cost carriers and basic fares is a clear signal from passengers that many of them are not willing to higher fares simply for a few extra luxuries. After all, at its most basic level, the main purpose of air travel is to transport passengers to their destinations safely and in a timely manner. In this respect, a basic fare is no different from more premium services.
