The price of product attributes is becoming more explicit, writes Chris Tarry of CTAIRA, with analyses from Fabrice Tacoun of Flight Insight

Within the past few weeks there have been some potentially significant changes in the European low-cost carrier (dubbed New Model Airlines because of their fundamentally different business model) sector with managements at both Flybe and Ryanair announcing that they will charge for checked baggage. This appears to suggest a potentially fundamental turning point in the industry that has significantly wider implications related to product and to pricing transparency.

Airlines Market analysis Feb 06 W445

As we have often argued in this column the airline industry is indeed subject to the rules of economics in all respects. Against this background it is perhaps timely to revisit some of the issues associated with consumer preference and its application to the low-cost sector given some of the recent announcements and developments here.

When buying an airline ticket the customer in effect acquires a bundle of “product attributes” of which the main one is the right to fly between point A and point B. Within this bundle other directly observable characteristics include the airports used (which have a value related to convenience), timing and frequency. On the basis of the bundle of attributes available the customer makes a judgement on whether the price offers best value to them when set against the price of the next best alternative.

However, until now, the price of a number of the attributes often tended to be implicit rather than explicit. In the early days of the development of the low-cost sector in the UK, the markedly lower fares offered by the new entrant airlines not only resulted in additional demand (although recent research by the UK CAA suggests that what in fact happened is that demand has been brought forward) but also a degree of switching, as the initial competitive advantage offered by this group of airlines was a significantly lower price.

While this advantage persisted it meant that low-cost carriers were a sufficiently attractive substitute and that customers were prepared to trade attributes for a lower price.

Although globally low-cost carriers may display some common features, their offer is not identical and neither is the market environment in which they operate. In the UK the initial reaction by the incumbent airlines British Airways and bmi British Midland was to change their fare structures and effectively compete on price. As a result the initial competitive advantage offered by the low-cost player was reduced and the attention of at least a significant group of travellers became focused on the other attributes that were offered; one of which was airports used, another being a defined seat assignment.

There are a number of theoretical and actual approaches to increasing the offer for the customer, and complexity for the airline. In each case the starting point is broadly the same. The common element of the product is the flight between two identical or sufficiently close airports. Differences however emerge over the additional products that form part of a package and whether they are offered in a single ticket price (ie the “add ons” are implicitly priced) or they are individually and transparently priced, including among other elements, checked baggage, lounge accessor on-board refreshments.

What really matters for the airline is whether the provision of these additional attributes adds profitable revenue. In the case of baggage charging there is the wider issue of whether it results in a behaviour change on the part of the passenger and in fact reduces complexity

A number of airline executives have used the example of car manufacturers, which have shown that to compete they needed to increase the specification of the product offered, some of which has been recoverable through price, but not always. It is possible to apply this to the airline business. There has clearly been a structural shift in prices, but will they begin to rise. Here the omens are not particularly encouraging for the price of a basic flight alone. The focus now is perhaps not only on what should comprise the bundle of attributes, which represents the product offered, but on how it is priced. The customer wants to know how the total price for a transparently bundled group of product attributes compares with that of the implicitly priced bundle of for example BA. What would appear to be clear is that low-cost carriers are beginning to add attributes to create a product bundle. This trend will continue. Now it appears consumers will demand more, the issue is the extent to which they are prepared to pay for it. ■


Source: Airline Business