Checked Bag Fees Illustrate Typical Reaction To Unbundling

Apr 07, 2016

 

The JetBlue decision to start charging for checked bags generated the typical, and typically wrong, reaction to unbundling.

 

In June of 2015 JetBlue, one of only two airlines that did not charged for checked bags, announced the introduction of a $20 fee for the first bag.

 

The New York-based carrier said travelers who book the lowest "Blue" fare can check a bag on a one-way trip for $20 during online check-in or $25 at an airport ticket counter. To avoid the charge, customers can book a "Blue Plus" fare that typically is $15 more than the base ticket price, it said.

Reuters

 

This practice is known as unbundling – the breaking out of services that were once included. It has long been a part of air travel, which has continued to unbundle things like food, baggage fees etc. – charging for things that were once "free", or, more accurately, included in the cost. It generally (this case included) generates a very angry reaction among consumers, as illustrated in a a post called JetBlue Charges a 20 Dollar Bag Fee, Hates Us All.

But these things were never free, they were just bundled into the cost. That could be good for the people that took full advantage of them – travellers that checked multiple free bags and enjoyed airline food – because the cost was subsidized by all the travellers that paid the same fee and did not use those extra services.

 

"Half of the customers don't even check bags," Marty St. George, JetBlue's executive vice president for commercial and planning, said in an interview. "In effect what's happening is, the customers who aren't checking bags are paying for the customers who do."

 

The truth is this should benefit travellers, who are now more able to pay for only exactly what they need. Don't need to check a bag? Don't pay for the privilege. Prefer to bring your own food or go without? Don't pay for airline food. Don't need flexibility or the ability to cancel? You don't have to pay.

 

The airline's approach to fares lets customers pay for what they need, he said. For example, travelers can book a "Blue Flex" ticket - generally $100 more expensive than the one-way base fare - to have two checked bags and no fees for changes or cancellations.

 

The problem of course is that for some travellers, the one that check bags, the cost is going to go up. The ones that don't will hopefully see a decrease, but not one that reflects the true savings. This is clear because the airline talks openly about the additional revenue the changes will generate:

 

...estimating it would earn some $65 million in 2015 and more than $200 million within several years from charges associated with new fare options.

 

Air travel is very competitive, and there is a lot of pressure on price. The airline hopes that this will generate more money, but competition will likely keep the costs down. To some extent the airline has to make this change to remain competitive – most people book airline tickets by doing price comparisons, and if you are one of the only vendors whose base price also includes baggage fees it is very hard to be competitive.

Unbundling is part of what has reduced the cost of air travel. You get less than ever before, but you pay less too.



Tags: Unbundling
Category: Examples

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Related Material

Unbundling in the Airline Business

An air carrier starts charging for the first bag and provides a great real-world example of unbundling in the process.

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