A-La-Carte Pricing in the Airline Industry - Graduate Student ...

ConclusionThis discussion in this chapter outlines a cohesive theory for why most U.S. airlines havemoved toward an ancillary revenue model based on two-part pricing and why this change did notcome about until the 2000s. From a theoretical perspective, the two-part pricing arrangementallows airlines to price differentiate and capture additional revenues from customers withheterogeneous tastes for ancillary products and services. By separating ancillary fees, an airlineis able to obtain additional revenue from consumers who highly value such attributes, while stillattracting customers who prefer not to pay for such additional products and services.While this strategy represents a strategic equilibrium for airlines, entrepreneurialattention was focused on other aspects of the airline business following deregulation such asrevenue management and network planning innovations. Nonetheless, changing conditions fromLCC competition and exogenous shocks increased airline entrepreneurs‘ incentives to seek outunbundling and a-la-carte pricing strategies. Given these incentives, and an inability to raisesufficient revenues through fare increases due to excess capacity, entrepreneurs began examiningways to further earn revenues from consumers through price differentiation methods.While theoretically sound, these pricing techniques came with uncertainty and potentialfirst mover problems. Given a difficult economic environment and competitive pressure, thepotential payoffs from ancillary revenue relative to the uncertainty compelled airlines to ―pull thetrigger‖ and accept uncertainty associated with moving to an a-la-carte model.Ultimately, the four factors discussed as primary drivers to the ancillary revenuemovement combined to create the ideal conditions for a-la-carte pricing to emerge in the mid-late2000s. First, the industry was buffeted by shocks that affected airlines‘ balance sheets and leftthem trying to find additional sources of revenue. At the same time, new technological changes44