Bundling has long been a business strategy for delivering added value to customers by combining certain products and/or services and offering them at a reduced price. While this may generate additional revenue for the seller through cross-selling, it does not necessarily generate the highest revenue per unit for the seller.
Unbundling, on the other hand, is a strategy for maximizing per unit revenue for the seller. A good example of this is your local junkyard–the junkyard owner buys a car for $100 and then sells all of the individual parts and pieces to his buyers for $1,000. This is great for the seller, but not necessarily a good value for the customer.
While strong competition in the market place may offset the seller’s ability to create large margins, the net effect of unbundling is to generate higher revenue for the seller at the buyer’s expense. Banks have done this with their plethora of service fees, and now the airlines are doing it with baggage fees and meals–both traditionally bundled with the total fare–and with some new ancillary fees such as WiFi and expanded seating options.
Then there’s rebundling. Once a market has accepted the new unbundled fees as an additional cost of doing business, the seller can then begin to cross-sell and up-sell, by rebundling various combinations of products or services along with their base offering. The airlines are now doing this with fare families. In addition to the extra revenue generated, this strategy makes it very hard to shop and compare ‘apples to apples’ because of the variety of bundled packages that are delivered via search results. In turn, this removes the transparency that we have become accustomed to as travelers.
But what does this all mean?
Basically, with the consolidation of airlines into a few large carriers, those companies are now in a better strategic position to keep seat inventory low, keep their planes full, and charge those ancillary fees. The traveler now has access to extra services or comforts at their discretion. The travel professional should be allowed to sell these services at the time of ticketing.
We see this beginning to happen as the Global Distribution Systems are integrating this new content into their systems. Travel managers will now need to decide which services (if any) they will allow their travelers to purchase, e.g. WiFi so that their road warriors can be more productive in-flight. In terms of cost, this means that travelers and travel managers can expect to see total airfare costs rise.
Is this a bad thing? Given that most of the major airlines have been in and out of bankruptcy for decades, they may finally have found the success formula they have been missing. And for all of us who rely on the airlines every day, the extra costs may be a fair trade for a healthier airline industry.