A dissertation

3.7. Looking Ahead

The analysis of Southwest’s implementation of fees is particularly enlightening and helps explain why the debundling trends seen in the United States are distinct from those in Europe and other parts of the world. Southwest is a powerful domestic marketing force, but it is a carrier that historically has had a strong philosophy of not charging for fees that were once bundled into its base fare. Southwest also places a high priority on its brand and maintaining long-term repeat customer business. Through its recent merger with AirTran, Southwest should be able to further expand its domestic market share as well as begin to expand to international markets. As Southwest grows, U.S. carriers may be pressured into revoking those fees that at one time were bundled into the ticket price. It will be particularly interesting to see, after Southwest completes its merger with AirTran, how much additional pricing pressure Southwest is able to put on Delta out of Atlanta’s Hartsfield-Jackson airport. If a major carrier such as Delta revokes baggage fees, all other major carriers will likely do the same. This highlights the importance of viewing the short-term and long-term consequences of ancillary fees in terms of existing market competition. For example, although the events of 2008 and 2009 led to rapid debundling, one of the benefits has been that many airlines did well financially in 2010. However, if demand for air travel starts to outpace available supply, one would expect airlines to start dropping or eliminating fees as they compete to win these additional customers.

Viewing changes through the lens of current market positions also provides insights into why similar campaigns have failed in the past, and which ancillary revenue sources are likely to survive moving forward. One example of a campaign that “failed” is American Airline’s promotion of extra leg room throughout coach in the late 1990s and early 2000s. American invested millions of dollars in retrofitting its planes to offer more legroom, but it operated these aircraft primarily on short-haul domestic flights, many of which were facing increasing pricing pressure from Southwest. Consequently, customers were not willing to pay for extra leg room on short flights. In contrast, Delta recently announced that it was adding legroom in coach – but to serve customers in their long-haul international markets. These international markets currently face less price competition, and extra legroom in this context is more valuable to consumers (suggesting they are more willing to pay). However, as with American’s experience, if market competition changes and low-cost carriers begin to compete on international markets and/or offer better products on these markets, then Delta’s long-term ability to charge a premium for these seats will be diminished.

What is clear from this discussion is that the debundling phenomena in the United States has been rapid and is still in transition. In the long term, it would not be surprising if low cost carriers competing with Southwest Airlines adopted a wider range of ancillary fees, whereas network carriers followed the trends of Delta and United and eliminated many of the fees that were recently introduced for services that once were perceived to be free to consumers. For example, when Delta merged with Northwest, it initially adopted Northwest’s practice of charging for preferred seats (Delta Air Lines, 2008); however, due to backlash from its premium customer base, these fees were quickly eliminated. Similarly, United used to charge for close-in ticketing fees for those customers redeeming frequent flyer miles (i.e., fees that were charged if customers redeemed their miles for tickets within 21 days of departure), but recently eliminated these fees. Delta also adopted a similar policy as of June 3, 2010 (Delta Air Lines, 2010). Both of these examples suggest that adoption of ancillary fees is still dynamic. The two major sources of revenue generation – baggage and seat fees – will likely be the longest surviving fees. However, as the U.S. market returns to healthier economic times, even these fees may disappear, particularly if Southwest stays true to its core pricing and customer philosophies.

3.8. Summary

Looking ahead, the “ancillary revenue” phenomenon is likely to continue in the U.S. market among low cost and network carriers. Numerous airlines are reporting the importance of ancillary fees in their investor reports and/or listing generation of these fees as a top priority (e.g., see AirTran Holdings Inc., 2009). In its March 26, 2010, presentation to Barclay Capital High Yield Bond and Syndicated Loan Conference, Continental stated that one of its five top priorities in 2010 was to “increase ancillary revenues through customer choice” (Continental 2010a; Continental 2010b). Continental elaborated, stating that it plans to grow these ancillary revenue streams through product debundling (baggage fees, booking fees, in-flight amenities) and product enhancements including day-of-departure upgrades, preferred coach seating, premium wines and liquors, PetSafe and “many others to come” (Continental, 2010a).

What will be interesting to see is whether future ancillary revenue enhancements follow the trends seen with baggage fees (in which clear market segmentation quickly emerged); or if technological, customer acceptance, market competition, and other constraints will hinder airlines’ ability to universally adopt ancillary fees (as in the case of seat pricing). What is clear, however, is that the debundling phenomena has arrived in the United States, and the full implications of debundling have yet to be realized but will likely be important to account for in both the public and private sectors.

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