Wednesday, March 26, 2008

Unbundling Air Fare Costs

,Today Delta matched earlier moves by United and USAirways to charge $25 for a second checked bag. This is both a reaction to increased operating expenses due to escalating fuel costs as well as the clear desire to unbundle airfare pricing. It is interesting to note that this fee " will not apply to first-class or business-class customers or members of Delta's frequent-flier program who log at least 25,000 qualifying miles of travel per year." "Those travelers will still be able to check up to three bags without extra fees". This week JetBlue also announced a fee for seats with more legroom, a practice used by United for many years. Apart from the obvious economic motivation for these actions, unbundling airline pricing is as much about customer segmentation as product differentiation. For years the airlines have resisted the notion of the airline seat as a commodity. Despite this effort, most travelers only differentiate the airline's product based on their personal loyalty value (e.g. frequent flyer programs and in particular the ability to upgrade) or poor service experience. I have to confess I have fallen into this trap as well as every time I fly AA I seem to have a problem, though countless stories of a similar nature can be found with any airline. The more interesting effort at play here is the customer segmentation strategy. Yes airlines tend to be lemmings and add fees or change services based on a market leader implementing a change, but trying to better target higher value customers is a noble goal for any business. The irony of the airline industry is that thought the carriers pioneered loyalty programs, they have great difficulty in implementing customer segmentation at the point of purchase. This is both due to the number of players in the value chain (e.g. travel agency (or TMC) GDS, payment providers) and the legacy technology used to distribute their inventory. As long as the customer information is wrapped together with the transaction stored in a old 60's style mainframe, airlines will have continued challenges in their attempt for differentiation their products and ultimately offering dynamic pricing reflecting the customer's true value. The market leader in unbundling airfare costs has been Air Canada and thus their motivation to re-engineer their airline CRS system with ITA software.

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