SKP: Legacy airlines need to consider price surchages

16 July 2013

Surcharges may well be the only way back to profitability for legacy airlines,'' claims Jonathan van Spijker Baan, Senior Consultant at Simon-Kucher & Partners in Amsterdam.

European and local regulatory authorities have recently launched several initiatives to increase price transparency in the travel industry. Key objectives include more price-transparency, ensuring advertised prices include all unavoidable costs and that consumers can select optional services themselves by 'opting in.' Hard measures will be taken for businesses that do not comply with the rules.

The industry is, however, still gearing towards more unbundling: charging fees for services that used to be part of the regular ticket price (e.g. checked luggage and seat selection). Low cost airlines started off long ago. They successfully took away a large share of the market from legacy carriers by offering attractive ticket prices to consumers. Consumers then could choose the additional services they desired. As Ryanair's CEO Michael O'Leary once put it, the airline industry is similar to the cinema industry in its potential to someday generate more revenue with non-ticket sales than with ticket sales.

simon kucher partners baggage

Price unbundling

Once unimaginable, legacy carriers are now starting to unbundle as well. KLM and British Airways have recently started charging for checked bags, supposedly to allow them lowering base ticket prices to improve competition with low cost carriers. At the same time, low cost airlines take unbundling one step further by applying price discrimination techniques not only to tickets, but also to surcharges. Ryanair currently differentiates its prices for checked bags and for seat reservations based on flight date and destination.

Although it may be claimed that further unbundling is not necessarily beneficial for consumers, it seems to be the only way back to profitability for many companies in the travel industry. ''Price comparison websites have made price the most important weapon in the market share battlefield. At this point surcharges may be the only way of generating additional revenues,'' says Van Spijker Baan. ''Legacy airlines in particular should take the opportunity of using these surcharges to accentuate their added value, as in their struggle to regain profits they are unlikely to win the cost-cutting battle against the low cost carriers,'' the consultant adds.

While surcharges may make price comparisons more challenging from a consumer perspective, Van Spijker Baan points out that in the long run consumers may benefit from clearly communicated, optional surcharges. ''Surcharges will result in lower ticket prices and more freedom in purchasing tailor made travel products for the consumer,'' he explains.


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