disaggregated pricing

Not too long ago, air travel, both domestic and overseas, was associated with excellent in flight service. Airlines then served good food, provided newspapers, had user-friendly booking and re-booking services, and maintained a ticketing system that was quite elaborate and service oriented. I recall that in that setup, all costs were paid up front. It was designed to cater to the business travelers who were considered more discriminating and demanding. Calibrating the services to what business travelers expected set the standards for air travel. And that was one super standard.

To keep operations viable, airlines front loaded the airfare to include all these amenities and expected services even if on some occasions these services were actually not utilized. Front loading the airfare, or what I call aggregated pricing, is based on the assumption that air travel needed to be comfortable and compensate for the stress related to air travel. It was also based on the assumption that air travelers were faced with imperfect conditions such as scheduling and carry-on baggage. Because of the front loaded airfare, the cost of air travel appeared somewhat prohibitive to many travelers. Many took to other travel modes such as land and sea travel. Back then, air travel, sea travel and land travel co-existed and were not threats to each other.

Cebu Pacific reinvented air travel in the Philippines. It disaggregated airline services and prices by cutting the air fare to its basic minimum. Cebu Pacific even ventured to sell seats at very attractive promo rates to fill up the capacity during months when travel was expected to be at its lowest. Components of the air fare such as food, newspaper, re-booking, check-in baggage, insurance and other items were disaggregated and charged only on demand of the specific service. I call this disaggregated pricing, the opposite of aggregated pricing. Cebu Pacific compensated for the scaled down services with in flight entertainment courtesy of the flight crew at no additional cost to the airline.

Disaggregated pricing is a form of radical pricing but quite different from the radicalized pricing strategies adopted by successful ventures such as Google, Yahoo and Wikipedia which provide the basic service and earn revenues from volunteered payments and democratized options. The strategy must have been successful for Cebu Pacific. It now claims to be the number one airline in terms of passengers flown and has aggressively added capacity through the years.

The strategy employed by Cebu Pacific also restructured the travel industry. Sea and land travelers saw the economics of disaggregated pricing and started traveling by air. Employees and students who in the past could not afford to travel domestically and overseas found the upfront and downloaded cost low enough to travel. My employees have pre-booked their flights way ahead and have been traveling at least twice a year to local and overseas destinations. Domestic tourism improved. Even travel to overseas destinations covered by the pricing strategy increased.

Disaggregated pricing had many social and market benefits. It was a good strategy. I thought so too until the realities of imperfect information started setting in.

My meetings in Cebu and Catbalogan on October 21 and 22 were cancelled right after I booked my flights online. It was too late to cancel or re-book the flights so I decided to go ahead with the trip by setting other appointments. Since the original flight back to Manila was two days later, I was able rebook that flight from October 23 to October 29. Well, for that rebooking, I paid a penalty of P934. On the way to Tacloban airport on October 23, I realized that I rebooked the flight to October 29 and did not change the flight back to Manila to October 23. Good thing, seats were available. I had to pay an additional P1,500.

For that multiple destination from Manila to Cebu to Tacloban to Manila, I had to pay a total of P9,606.56 or around US$223.41. While the basic fare was only P5,494, I had to pay taxes and fees of P696.76, web administration fee of P106, travel insurance of P720, seat reservation of P224, SMS reminder of P5, security aviation fee of P15, and total penalty of P2,440.80. That was a lot of money for a local trip with only three stops. No newspaper. No food. Only cheap live entertainment from the flight crew.

So, is the disaggregated costing less costly? Not quite. Next time you book, check all the details.