Monday, 12 January 2015

The New generation Air Fare - The tip of the cost iceberg. Part1



Not too far in the past air fares used to be very simple. Most full and many discounted prices were mutually agreed among airlines through their trade body IATA and it was then up to the airline whether to discount or not.  Such discounting on ‘published’ fares was done on the basis of need, promised volume, destination promotions etc. There were other lower cost fares for seamen, groups, the ethnic market and other special cases.  All seemed to function well until two key changes happened, firstly ‘low cost’ airlines came on the scene and then company procurement departments became influential in travel decision-making.


How did the old fares work? Well they were an ‘inclusive’ price for all the costs involved in the journey. From the cost of your agent for handling and changing the booking, providing corporate information, providing 24 hours support etc. In fact nearly 90% of what an agent did was providing support for the booking. Very often they even shared some of their fare income with corporate employers. The vast majority of the fare price went to the airline and they provided the operation, passenger service, choice of cabin, route licenses etc, and profit of course. 

         
From a traveller perspective the old type of fares was unpopular as they seemed (and in many cases were) high. They were also being wooed very effectively by new ‘no frills’ airlines such as EasyJet and Ryanair with their rock bottom pricing and huge marketing budgets. You see these airlines were focussed on consumers rather than corporations but their impact was huge in the thinking of the corporate traveller and company budget holders. This impact was made infinitely bigger by the bullish approach by such airlines via the media. There is nothing some journalists love more than being given ammunition to attack non responsive national airlines with.


Initially the no frills airlines saw corporate travel as very much a secondary market. Their focus was squarely aimed at the short distance individual traveller who didn’t mind ‘roughing it’ for very few hours on a cramped aircraft if it meant they could cut their air fare in half. They were even willing to fly into less popular airports and catch a bus if necessary. These airlines often bragged about their low prices and lack of concern about passengers, in fact Ryanair seemed to thrive on it. The erosion of the corporate travel status quo became quite advanced without anyone particularly noticing it until the point of no return had been passed.


The crunch for these ‘no frills’ airlines came when their passenger volumes stopped growing and I suspect their shareholders started asking questions. In their own way they had saturated their market to a point that they needed to find another source for new travellers. After all they were still ordering large numbers of new aircraft and their shareholders must have been asking how they were going to fill them. The answer?  Business travellers, who they began to recognise were more likely saviours than a liability.

They set about trying to win the very business travellers they originally scorned and soon found out that the basic service they provided was not adequate. These travellers wanted firm booked specific seats, more baggage allowance, easy check-in, improved peak hour timings to preferred airport locations. In fact all the things the main big national airlines already provided. Many no frills airlines now provide these ‘luxury’ services… at a cost. They also needed to offer their flights using the main booking systems that are tailored to this market and, guess what, charge a fee for using them.


As no frills airlines costs sneaked up they needed a way to charge the traveller whilst seeming to remain ‘cheap’. They achieve this by keeping their fares basic and cheap but offering add-ons through ‘ancillary’ charges. These charges soon mount up but currently remain reasonably well hidden from the corporation itself who still see the basic fare and little else. In the meantime the main national airlines realised that they too can use the same business model. So yes, their fates went down radically but their ‘ancillary’ charges grew massively.


So there you have it. One side had a very low fare which they needed to mark up, whilst the other side had high fares that they needed to mark down. They both achieved their goals in the same way by stripping the bookings down to its component parts and charging for all the basic services that people need at probably a higher price than they cost. This is a very ‘closed book’ and commoditised method of which is rife with dangers, for example we have seen a huge decline in the cost of aviation fuel but no change in ticket prices. Service levels have dropped with mainstream airlines as they have offloaded costs to compete. No frills airlines did not really have any noticeable service levels anyway but are now having to provide them.


So fares and service have gone down globally, but have they really? Ask travel professionals that question and I doubt any of them will say they are happy with the current status quo. I mean you didn’t seriously think that the airlines were going to charge less for the same service did you? Maybe in your dreams you might. Also check out the long distance no frills market and you will find there isn’t one. The model only works over short distances. How far across the world would you want to fly on a Ryanair service?



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