Unbundling: How airlines make a profit

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(Last updated on: 10/12/2020)

The aviation industry has changed exponentially in recent years. As passengers we used to know where we stood. Things were black and white. Everybody played by the rules. Well, since the likes of EasyJet and Ryan Air began to spread their wings (pardon the pun) things have become somewhat confusing. In fact, I would go so far as to say that the industry is a mess and that there are now so many shades of grey that us travellers don’t know whether we’re coming or going half the time. The cause? Unbundling.

Sure, unbundling makes an airline more profitable. But what does it mean for the passenger?

What is unbundling?

Back in the days when things were simple, we would get a ‘bundled airfare’. We bought a ticket to fly with a scheduled airline and in exchange we typically got a place to sit, a baggage allowance, some food and drinks. Simple.

Then came along the disruptors (aka the budget or low cost carriers). They, quite rightly, identified that not all passengers wanted all elements included in this traditional ‘bundle’ and they introduced the fare-only ticket. The title speaks for itself- it is a ticket with no additional extras included. What’s complicated about that? I hear you ask. Well, nothing actually. In fact, it is even more simple than the bundled fare. The complexities started when scheduled carriers started unbundling and low cost carriers started to bundle.

The concept of unbundling is really quite self-explanatory. It is when an airline takes elements away from what would usually be included in a traditional bundle. These elements are then offered instead at an additional cost to the passenger, allowing for the price of the base-fare to be reduced. This is an important part of ancillary revenue management.

For more info on ancillary revenue management and airline management in general I recommend the texts Airline Operations and Management by Cook and Billig and Air Transport Management: An International Perspective by Budd and Ison. You’re more than welcome to cite anything that I have written in this post, but if you’re doing research for an academic piece of work remember that you will need a range of sources in your reference list- I’ve added the links to these two recommended books for you here and here

Unbundling

The benefits of unbundling

Unbundling products in this way can do wonders for an airline. It allows them to gain revenue from selling products and services, many of which may not have been available before. It also allows them to differentiate their products more effectively- passengers can simply opt in or out of purchasing a particular product or service. For example, I am currently pregnant and so I would not opt to take advantage of the all-inclusive alcohol that continues to be offered by many scheduled airlines (although don’t get me wrong- I’d love a nice glass of red right now). On this basis, it would be better for me if I could pay less for my ticket in exchange for no alcoholic drinks.

Product differentiation in this way is actually very popular. In fact, as consumers we have become very picky in our wants and desires. We now live in a world where we can tailor products and services to suit our personal preferences in many different regards so there is most certainly an argument to say that airlines should move with the times and provide the option too. They do this through unbundling.

Ultimately, unbundling allows scheduled airlines to more effectively compete with low cost carriers. With profit margins being squeezed more than ever before, airlines are now turning to ancillary revenue as a strategy for remaining competitive in the aviation marketplace. There are different categories of ancillary revenue used by budget and scheduled airlines, as outlined in this post.

The disadvantages of unbundling

It might be a necessity for many airlines to stay afloat, but unbundling can have negative consequences on the airline. Remember I said that the airline industry has become a mess? Well this is a direct result of unbundling.

Do I get to take a bag onboard this flight with me?

Should I buy a meal deal from Boots at the airport or is food included?

Do I need to pack blankets for the kids or will there be one on the seat?  

These are the types of questions that passengers are now asking, often without a clear answer. We are confused. British Airways offers fares with baggage and fares without, Ryan Air offers fares with free cancellation and fares with cancellation fees. United include soft drinks in the price but not alcohol. It’s all incredibly confusing.

And it gets worse. Many airlines operate code-share schemes, meaning that you may book with one airline but fly all or part of your journey with their partner. This happened to me when I flew to Ecuador from London. I booked my flight with British Airways who operated the first outbound leg to Madrid, where I then boarded an Iberia flight to South America. All food and drink was (at the time) included on this first BA sector. The return journey consisted of two Iberia flights. Having been fed and watered on the outbound flight to Madrid I assumed I would have the same service on the return, only to find that there were no complimentary items, not even a glass of water. I was confused and quite frankly a bit annoyed at the lack of consistency and transparency in my journey. This has become an all too often occurring example felt by many passengers across the aviation industry.

Ultimately, unbundling is known to reduce customer satisfaction, particularly when it comes to loyal customers. People who have enjoyed a glass of wine on their flight for many years generally do not respond well to that privilege being taken away, for example.  Since the introduction of food and bag charges a couple of years ago British Airways have had many complaints from previously loyal passengers who have likely subsequently chosen to fly with a competitor for a lower price. Whilst the goal of unbundling is to reduce fares, airlines operating out of primary airports such as London Heathrow will always struggle to compete with airlines who are able to offer comparative flights at significantly lower costs out of secondary or tertiary airports where the fees are substantially lower.

At the end of the day, the aviation industry is evolving and the airlines need to change with it, what exactly is the best approach, however, is yet to be determined. What are your views? Leave your comments below. 

2 Comments
  1. Danial

    I get where you’re going with this – premium airlines see that low-cost carriers are making money from ancillary revenue so they think that by doing so, they will be able to capture some of the market share.

    These airlines should go deeper and further differentiate between loyal customers (who have to qualms paying for the best service) and those looking for a good deal (basically the rest of us). Lumping them all together then asking the loyal customers to pick-and-choose their bundle is a wrong move.

    Reply
    • Hayley

      Yes, I don’t think they have got it quite right either in most cases!

      Reply

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  1. What are the categories of airline ancillary revenue? | Lifeasabutterfly - […] Just like an ‘a la carte’ menu, these are products and services that the consumer can choose on an…
  2. What is Airline Ancillary Revenue Management? - Tourism Teacher - […] and turbulent industry. Increasingly we now see airlines such as British Airways and Qantas unbundling their products and charging…

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Hi, am Dr Hayley Stainton

I’ve been travelling, studying and teaching travel and tourism since I was 16. Through Tourism Teacher I share my knowledge on the principles and practice of travel and tourism management from both an academic and practical perspective.

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