Monday, October 25, 2010

disaggregated pricing (part 2)

When my kumpadre Ed Tiambeng, a seasoned traveler, was penalized for re-booking his flight to Tacloban even if it was one week ahead of the original schedule, he got smoldering mad. From the smoke of madness, he came up with a not-so-bright idea of calling his congressman to propose a bill that will ban penalties for rebooking if the ticket was rebooked at least two days before the flight.


It is a not-so-bright idea because the same rule will apply to all airlines. The airline with the advantage will still keep that advantage no matter how small that is. It is also not certain if government will have the facilities and ability to regulate this option.


Michel Roberts, my favorite strategist, argues that a market leader would always have the advantage if what the competitors did was merely to try to out-compete the market leader. If they exploit the weakness, if there is any, the market leader would have the size and muscle to adjust and overcome the weakness. If they compete head-on focusing on the strength, there is just no way that the market leader would lose. Roberts consider the SWOT approach as irrelevant for this reason.


Herbert Hoover, the 31st president of the United States servicing from 1929 to 1932, advocated and pushed for efficiency management. That framework suggests that government is inefficient and should be less visible in sectors where the private sector is capable of producing the desired capacity. He favored a strong government and private partnership. For all his failures at the onset of the great depression, Hoover presented a solid governance principle. We should not allow government to spread its tentacles.


Instead of seeking for a legislative initiative, competitors should consider this failing as an opportunity to create its own arena of competition. It is possible that Cebu Pacific’s system was designed to support the disaggregated pricing. No Board would ever support the mothballing of a huge investment based on a speculative notion. My best guess is that the Board will vote to sustain that strategy if it comes to that. On the other hand, other airlines can easily sway to a new system with less complication and with nothing to lose. If they do, they have my attention and my money.


One possibility is for other airlines to create a system that will credit delays in flights to penalties for rebooking. This approach has two benefits. First, it would endear the airline to passengers who have suffered so much from the disaggregated pricing scheme. Second, it puts some credibility in the airline’s mouthful of promises.


A more radical approach is the pizza approach. Pizza not delivered on time becomes free. Passengers pay only if the flight leaves and arrives on time. Passengers pay 50% once the plane departs on time. The balance is payable on arrival according to on-time performance. Hah, that would be one super strategy. Of course, the only way this may be implemented is if the system supports it. If an airline has a working system in place that supports a different approach, like Cebu Pacific, it would take more than a normal effort to calibrate if at all that is possible. If none or a different one exists, that airline is more flexible.


If you have other ideas, email to abfontanilla@yahoo.com.


Saturday, October 23, 2010

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.