No, Flying Today Is Cheaper, Thanks To Unbundling

Oct 21, 2016


This article is fascinating because it so clearly misses the mark. Despite what the author says the cost of travel is cheaper today, thanks largely to unbundling.


Over the years the airline business has increasingly "unbundled" their product. Things that used to be bundled into the cost of the fare (checked bag, meal, etc.) have now, for the most part, been unbundled and are sold à la carte.

The airline industry likes to point out that flying today is, when inflation is taken into account, cheaper than it has ever been. The author of the article Don’t believe the airfare spin: Cost to travel is sky high disagrees.

To make his case he adds he cost of every single currently available à la carte item to the cost of a currently refundable base fare and then compares the total to an inflation adjusted fare from1975. Using this approach yes – modern travel is more expensive.

But the approach is just wrong. For example when calculating what he considers to be the "true" cost of a modern airfare he includes the $25 charge for calling the reservation line. In 1975 that was the only option but who new it was still even available? And who would want to use it if they did? Most flyers would far rather book online, and would happily see some of the cost of running the reservation center deducted from their basic fare.

And that is of course the entire point of unbundling. In the case of travel you are selling a core benefit – transportation from A to B. There are then a whole bunch of secondary attributes – things like checked bags, meals, etc. These are related to the primary benefit (and so they were originally included or "bundled") but are not the same thing. And unbundling reduces the base cost of the product.

Take bag fees. Clearly there is a cost to transporting bags. Baggage has to be handled extensively by costly union labor at both ends of the flight. The extra weight means more fuel is burnt.

Checked bags were never really free, they were just bundled into the cost of the fare. That means that everyone on the flight, including passengers without a bag, were paying a baggage fee that was bundled into the price. If you didn't have a bag you were subsidizing the fare of someone that was.

But luggage is secondary. Unbundling those fees means that only people who check bags are paying. The cost of transporting your luggage might have gone up a little, but the base fare went down.

Meals are similar. As a side note it's interesting that when meals were included they were universally despised. Since being unbundled they are remembered quite fondly.

Again – those meals were never free, the cost was just bundled into the fare. You paid whether you ate them or not.

Now you don't get a lousy free meal, but you do get a lower fare. And again that is what we're really talking about – the cost of air travel went down, but the cost of eating at altitude went up. Although it's worth noting that you now get access to better food because they want you to buy it.

The argument about refundable fares doesn't hold up either. Clearly there is a cost to the airline associated with offering refundable fares and, again, this cost was in the past bundled into the base fare. Now it has been broken out, and you don't have to pay for it unless you want it. This means the flight is cheaper.

The entire argument is flawed. Imagine someone who needed a car for basic transportation. They go to a dealer of Korean cars and learn they can get a compact for just under $200 a month. Then they go to a Bentley dealer, who tries to sell them a Bentley for $3000 a month.

The customer would likely say "thanks but no thanks, the $200/month Korean compact provides the transportation I need". But the Bentley dealer insists otherwise, saying that they have to take into account the cost of transforming the Korean compact into a Bentley. It just does not make any sense.

The price of travel is low, and that is thanks largely to unbundling.

Tags: Pricing
Category: Miscellany

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