Upgrade: Travel Better has an extensive post on fuel surcharges and the idea that airlines might start ‘unbundling’ fares such that you buy fuel separately from your entrance onto the aircraft… and speculates that this could lead to unbundling of oither services as well — like food, baggage, early boarding, and legroom.


Fuel surcharges are really just ‘disguised’ price increases. They aren’t some magic formula for airline profits. Fares are presumably at a market price indicative of what a seat might sell for. So how are fuel surcharges even beneficial, if the market won’t bear a meaningfully higher price for airfare? And why not just attempt a price increase?


Fuel surcharges

1. set a price floor. The airline precommits not to lower prices beneath that level. So even if a fare goes to zero the airline still receives the fuel surcharge. This is especially an issue in Europe where fuel surcharges can be US$100 each way.




2. publicly signal price hikes. Usually airlines attempt to raise prices through coordinated increases in fares displayed through global distribution systems. An airline moves first, some airlines follow suit, sometimes all do and the price hike sticks. But it requires signaling and the first mover may lose sales in the short run while other carriers decide whether to match. A fuel surcharge can be publicly announced to begin at a future date, allowing airlines better coordination on pricing (while steering clear of antitrust concerns) and without losing sales while other airlines sort out whether they’ll follow suit. (An airline could just load a set of higher priced fares that begin at a future date in order to accomplish the same thing, but this would involve changes to every fare for every city pair and would involve more ‘noise’ in signaling).




3. generally apply to pre-existing corporate contracts, while fare increases might not (or might not apply in full, as a contract fare might be for x% off).




4. can be made to apply even to ‘free’ tickets. Applying fuel surcharges to award redemptions is very common in Europe, less so in the U.S. Delta has begun tacking on such a charge on Air France reservations. My recent roundtrip business class mileage award redemption on British Airways cost about $320 (including the British luxury tax on premium cabin travel). A similar ticket booked on British Airways but with Cathay Pacific miles cost over $500!




5. could potentially follow cruise lines, and be applied retroactively to tickets already purchased but not yet flown. I don’t see this happening, both because airlines affect more passengers than cruise lines (and thus make for more unhappy customers and better media stories) and because enough deep pocket companies would be hit — compared to individual leisure travelers cruising — such that a well-financed lawsuit might be more likely. (Although I’m still surprised that there aren’t more high profile class action suits financed by law firms that stand to gain than there already are.)

Here is a previous post of mine explaining airline rationales for fuel surcharges . Here is a post on on airlines sending coded messages to each other through their fares. Here is where American got in trouble for announcing future price changes (although the legal problem wasn’t anti-trust per se — it was that they had settled a previous anti-trust investigation by limiting their future actions and they apparently violated that agreement, not anti-trust law). Here is a discussion of Northwest ‘unbundling’ other fees from their published fares and why the whole thing was more or less a ruse.


But what about further ‘unbundling’?


People Express used to charge per luggage piece, not including any “free” baggage allowance for each passenger. And they used to charge for the can of coke on board, too. (When I was quite young I used to really enjoy the onboard snack basket available for purchase, perhaps it’s just the memory of youth but it seemed so much more appealing than competing buy on board offerings today.)


Delta just started charging for the plastic bags used to wrap strollers and carseats checked in as baggage. Northwest charges a fee to pre-reserve preferred coach seats (which are towards the front of the plane but in most cases don’t offer any other advantages)


In Europe the low cost carrier market is fraught with such charges as checked luggage fees (sometimes with a discount for prepaying online).


Airlines already unbundle food and legroom from the basic product, by offering a separate business or first class cabin. There they offer a different set of bundled services rather than offering each option a la carte.


Taken to the extreme, unbundling allows those carriers to offer lower advertised fares than their ‘full service’ competitors while still extracting higher revenue than those fares would otherwise suggest. And as the practice spreads it may become more likely that full service carriers will follow suit in order to compete, on the theory that consumers don’t calculate their total trip cost very well but just respond to advertised airfare.


On the other hand, though, it’s not clear that total unbundling of services actually leads to higher pricing. An individual buying all services separately might pay more than before, but total revenue could well fall. This is why Microsoft ‘bundles’ Internet Explorer with Windows, and why cable companies sell packages of channels rather than offering each channel for an a la carte price. It’s not just a good deal for companies bundling products, it improves total consumer welfare as well. Here’s a simple illustration of the concept and how it works with cable television.


As a result I just don’t see airlines going there (although on the whole the industry never ceases to amaze me in its ability to make decisions contrary to financial interest).