Airlines: "A La Carte Pricing Is Working"

Continental’s Airlines’ decision to cut the maximum size for carry-on bags to 45 linear inches from the previous 51-inch limit, along with Continental and other airlines charging coach passengers $15 for a first checked bag, may have many customers viewing it as nickel and diming.

But the airlines see these decisions as revolutionizing decades-old revenue models, which means that the trend is likely to continue for a long time. Airline executives told analysts in October that they would retain the checked-bag fees and other ancillary charges they’ve initiated since fuel prices began accelerating higher earlier this year. And airlines are also committed to hunting for even more of these revenue opportunities.

Darin Lee of the airline consulting firm LECG says the latest moves by the airlines mean that “the trend toward unbundling is accelerating.”

With more technology available to accommodate their desire for a la carte fees, carriers will likely begin offering a broader menu of “value-added services,” increasing cash streams for carriers and even third-party distributors.

Because of the added fees for checked bags, American and Continental reported increases in revenue and decreases in checked bags. United says it expects these new revenue streams to generate well over $1 billion in 2009, a $400 million increase over 2008.

United says it is seeing benefit from putting more choice in the hands of customers.

“We believe that these unbundling initiatives are resettling the value proposition for both non-elites and elites, giving price-sensitive customers new, relevant options to purchase the value they want while reinforcing our elite frequent flyer travelers with the value we place on their loyalty,” said John Tague, United’s chief operating officer.

“We may be looking at an unprecedented change in the way airlines will retail their products and services, which has essentially been the same since they began selling tickets decades ago,” said Robert Buckman, director of airline distribution strategies for Amadeus North America.

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