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The Indian airlines industry has accumulated losses of USD 11 billion over the past eight years[1]. Massive upfront capital investments, restrictive policies and adverse input costs have meant that airlines in India have not fully benefited from the overall economic growth of the country over the past decade. The game changer for the industry could come from unbundled services.
The Director General of Civil Aviation (DGCA) in its recent circular[2] has allowed airlines to unbundle the services they offer and charge a separate fee for each service. This was a long standing demand of airlines. The DGCA has allowed airlines to charge separately for a variety of value added services such as preferential seating, in-flight meals and drinks, using airline lounges, checking-in baggage and checking in musical instruments and sports equipment. The circular further states that these charges will be fixed in advance by the airlines and would not vary with the base fare on any particular sector or flight.
Rationale for unbundling
Historically, air travel was limited to the rich and was associated with luxury. Over the years, the offerings of airlines have evolved and so have customer preferences. The core service of an airline is to transport people from Point A to Point B. Today, many customers prefer low cost, no frills flights. However, airlines in India have hitherto remained stuck in an old-world business model. They offer all their services to all their customers - irrespective of whether a particular customer values a service or not. This leads to all customers paying higher charges for the availability of the services rather than their usage of the service.
This is akin to hotels charging exorbitant room rates because they have gyms, swimming pools and airport transfers available for "free". Customers who do not use these add-on services are in effect subsidising those who value and use the services. Customers who value a service may be ending up paying a lower price than what they would have agreed to.
In an unbundled airline, customers could choose to pay only the base fare. This will assure them a safe and timely transfer from their origin to destination, but...