Aviation: All bundled up

1 Mar 2019 by Craig Bright
Economy cabin

Full-service airlines in Asia-Pacific have largely avoided offering stripped-down economy class fares, but will this continue to be the case?

A flurry of activity dominated the transatlantic market in the summer of 2018, as a procession of traditionally full-service carriers began introducing new, cheap economy class tickets that did away with the inclusion of check-in baggage allowances. Air France-KLM – following in the footsteps of other legacy airlines like Aer Lingus, SAS (Scandinavian Airlines) and TAP Air Portugal – chose to begin offering a new “Light” economy class “hand baggage only” fare on flights departing from April 10, 2018 onwards between Europe and North America. In quick succession, United Airlines, the Lufthansa Group carriers, Air Canada and British Airways all announced plans to introduce similar hand-baggage-only fares on transatlantic routes during the 2018 summer season.

Driven by growing competition from low-cost carriers, these moves were the latest in a series of measures by traditionally full-service airlines across both sides of the pond to offer more “unbundling” options for passengers. These cheaper fares let passengers pick and choose whether to pay for specific additional extras. British Airways, for instance, partnered with retailer Marks & Spencer to introduce buy-on-board food on its short-haul flights back in 2016. Meanwhile, American Airlines had begun offering a new Basic Economy fare class that, when it first launched in 2017, didn’t even allow passengers to bring on board anything more than a briefcase without paying an additional fee.

Full-service airlines in Asia-Pacific, by contrast, have been surprisingly resistant to offering stripped-down fares. Meals, in-flight entertainment and check-in baggage  remain a fixture of even the cheapest economy class fare types offered by full-service airlines in the region, even on short-haul and domestic routes.

“The majority of Asian carriers are still offering an economy class fare and product that includes significant service elements,” says Andrew Herdman, director general of the Association of Asia-Pacific Airlines (AAPA). “That’s still the bulk of the sales.”

Over the past few years, however, there have been limited but growing instances of Asia-Pacific carriers introducing unbundling options. Singapore Airlines revised its fare structure back in January 2018, with a notable addition being a new, cheaper “Lite” economy class fare option that only includes advance seat reservation if you pay an additional US$5 per flight segment. A few months later, Cathay Pacific introduced the option to purchase advanced seat selection on its cheapest Economy Super Saver, Economy Save and Fanfare tickets for an additional HK$300 (US$39) – something passengers on these fares had previously been unable to do.

This begs the question: will travellers see full-service airlines in Asia-Pacific introducing unbundled fares in future?

British Airways new range of short haul economy food with Marks & Spencer

Customer expectation

Unbundled fares are attractive primarily because when travellers search for a flight, the first thing they see is a seemingly bargain fare – what’s termed the headline price – regardless of whether it may include various service extras. For occasional travellers, these low fares are appealing and budget airlines have found success in capturing a significant portion of this market. But for regular travellers, especially business travellers, flying without the usual extras is often a no-go and this is particularly so for customers in Asia-Pacific.

According to Herdman, one of the major reasons full-service airlines in Asia-Pacific have so far avoided introducing significant fare unbundling options is that passenger satisfaction with existing full-service bundles in the region is high.

“The sentiment in the US market is that customer service got driven out by the ruthless competitive conditions of a decade ago, which led to the bankruptcies of various airlines,” says Herdman. “Nowadays, the US carriers are very successful financially and are rebuilding service reputation. But Asian airlines have competed on service for a long, long time – and that’s the expectation. Customers’ benchmark is to expect a certain level of service and amenities.”

Asian airlines are not ignorant of the importance of customer perception and the negative implications that may arise from starting to offer some stripped-down fares, says Andrew Yuen Chi-lok, associate director of the Aviation Policy and Research Center at the Chinese University of Hong Kong. “Image is very important for traditional airlines; they do not want to be perceived as being like low-cost carriers, and want to have an image of premium service,” he says. “If they changed to an unbundling service, then their market positioning would become less clear compared to low-cost carriers.”

Why, then, have we seen some premium airlines, notably Cathay Pacific and Singapore Airlines, introducing paid advance seat reservation on their cheapest fares, despite eschewing most other forms of fare unbundling?

“Customers don’t necessarily expect pre-assigned seat selection. There are some airlines, even in this region, where you don’t actually have that option,” says Brendan Sobie, chief analyst at CAPA – Centre for Aviation. “A lot of people in Asia still buy from travel agents, and in some cases when you buy through that channel you don’t have pre-assigned seats, so maybe customers here are more used to that. They are not used to getting on a plane and not getting food or a beverage, or being asked to pay for them, or to pay for bags, or to pay to use the in-flight entertainment.”

A low price on an airline fare aggregator may seem attractive at first, but add on all the extras like meals and baggage and suddenly the price becomes far less appealing. Add to this the fact that budget airlines often sell unbundled extras at a lower rate during booking compared with at the airport, and an ill-prepared traveller can end up getting stung.

“This is especially so for leisure travellers – they don’t have very good planning when it comes to luggage,” says Yuen. “Many people in Hong Kong go to Japan, but when they fly with a budget carrier they have to pay a lot to fly back because they don’t have a plan for their luggage.”

AAPA’s Herdman adds: “There’s been some pushback from customers regarding the complexity of it and whether it’s a surprise when you find out how much you actually have to pay for baggage, particularly if you only find out at the airport.”

To date, only a few Asia-Pacific full-service carriers have followed their European and North American counterparts in offering hand-baggage-only fares. Back in 2016, Taiwan’s China Airlines began trialling an “Economy Let’s Go” fare on its Taipei-Tokyo Narita route that was cheaper but didn’t include check-in luggage within the price of the ticket. Passengers who changed their minds before travelling could buy up to 20kg of checked baggage allowance for US$30.

At the time, market observers speculated whether other traditional airlines in the region would end up following suit, though ultimately none did. “I’m not sure where that went, but they [China Airlines] were the only ones doing it,” says Sobie.

AirAsia X Premium Flatbed

Low-cost long haul

The widespread adoption and success of transatlantic hand-baggage-only fares has refuted the idea, common among full-service carriers, that low-cost long-haul is not economically viable. But low-cost long haul to and from Asia-Pacific has a troubled history.

When it launched in 2006, Oasis Hong Kong was in the vanguard of this trend, offering low-cost fares on non-stop flights between Hong Kong and London Gatwick, and later Vancouver. But the carrier was forced to shut up shop just two years later after it accrued debts of up to HK$1 billion (US$128 million), according to a BBC report at the time.

Recent years have not been any more kind to carriers trying to make Europe-Asia routes profitable using a low-cost model. After initially launching non-stop flights between London Gatwick and Singapore in early 2017, Norwegian was forced to axe the service in January 2019 in favour of a route to Rio de Janeiro.

“It just reaffirms that markets in Asia are very competitive, including Europe to Asia, and that the existing incumbents are offering very competitive fares, products and services,” says Herdman.

It seems, then, that few medium- to long-haul flights to and from Asia-Pacific lend themselves particularly well to unbundled fares. Chinese University’s Yuen cites the Hong Kong-Australia market as an example. “Business passengers are likely not very sensitive to pricing and are more concerned with the service, so it might not be very useful for airlines to offer unbundling options for them,” he says. “And if you’re talking about families and students, normally they need to have their luggage.”

Even low-cost carriers making medium- to long-haul flights in Asia-Pacific have realised passengers want a degree of comfort. AirAsia X, the long-haul arm of low-cost airline AirAsia, announced in January it would begin flying its Airbus A330 between Bangkok and Brisbane. The aircraft includes a separate cabin featuring 12 of its Premium Flatbed seats that are much closer to the product offering seen on traditional full-service airlines.

“Once you’re talking about 10-12 hours and above, it doesn’t matter what your business model is,” says Herdman. “The customer wants a degree of comfort and a certain number of amenities, so I don’t think we’ll see a shift to stripped down fares.”

Even if Asian airlines were to adopt cheaper unbundled fares on European routes, it would be difficult to make them profitable. Competition from Gulf carriers is a major reason for this.

“The major incentive with unbundling fares is to lower the price, but if you just compare flights between Asia and Europe, the fares for Emirates are already much lower than, say, for Singapore Airlines or Cathay Pacific,” says Yuen. “Even if they were to lower their prices by offering unbundling options, the price may still not be that competitive compared to Emirates.”

Alternative ancillaries

All this is not to say that Asian airlines will not continue to experiment with ways to increase non-ticket sales revenue (known as “ancillary revenue”).

In his Chairman’s Letter published alongside Cathay Pacific’s 2018 Interim Results, the airline’s chairman John Slosar said the airline “expect[s] to generate more ancillary revenue”. Indeed, Cathay Pacific has already shown signs that it will be looking elsewhere to generate additional revenue, such as trialling paid access to its airport lounges in Manila, Melbourne and Vancouver back in October.

While this has included some revenue attributable to unbundling – notably, paid advance seat reservation – increasing ancillary revenue doesn’t necessarily mean introducing stripped-down fares.

“Of course you’re going to grow ancillaries if you go for an unbundled product, but is that really a strategy for increasing your ancillary revenue?” says Sobie, adding that preferred seats, hotel and rental car bookings, as well as holiday packages all fall under the umbrella of ancillary revenue.

For other Asia-Pacific airlines, offering unbundled fares is not even an option due to regulatory issues. “In some markets [in Asia], there are still regulations that make unbundling difficult,” says Sobie. “It’s not as simple as Europe or the US. Some markets point blank don’t let airlines charge for bags; they have to offer free bags. You have regulations in different countries that protect the consumer and make it more difficult for an airline to do some of the things that have become so common in Europe or North America.”

Summing up the prospects for fare unbundling among Asia’s full-service carriers, Sobie adds: “Airlines in Asia have been under pressure from budget carriers – they face some of the same issues as full-service airlines in Europe and North America, but their response is different. The market here is different, the culture is different, consumer expectations are different. Unbundling isn’t the response, at least for now, and I don’t see it happening any time soon.”

As for Herdman: “People will continue to experiment. The pendulum swings back and forth a bit in terms of bundling and unbundling, and in the end it’s up to the consumer to decide.”

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