Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / How Airlines Made A La Carte Pricing the New Normal
Transcript
- Lucas: So it's June 2026, and you just booked a flight. Maybe to Chicago, maybe to Orlando. The base fare looked reasonable — $178 round trip. Then you added a carry-on, seat selection, and a bottle of water, and suddenly you're at $267. You felt a little cheated, but you paid it. Luna: I think everyone listening has had that exact moment. And what's wild is that twenty years ago, that $178 ticket would have included everything — two checked bags, a meal, a seat assignment, maybe even a newspaper. Lucas: Right. That shift — from all-inclusive pricing to a base fare plus a menu of add-ons — is arguably the most successful pricing innovation in modern commerce. Airlines didn't just raise prices; they changed the structure of what a price means. Luna: And they got away with it. Consumers complain constantly, but the industry keeps collecting record ancillary revenue. I want to understand how that happened. Lucas: Let's start with the origin story. It's 2001. Ryanair, the Irish low-cost carrier, is watching its margins get squeezed by fuel costs and competition. Michael O'Leary, the CEO, looks at his profit and loss statement and sees that the ticket price barely covers operating costs. So he asks a simple question: what if we sell the flight at cost, and make money on everything else? Luna: That's the birth of the unbundling model. And it was radical at the time because airlines had always competed on service included in the fare. Lucas: Exactly. Ryanair started charging for checked bags in 2001. Then priority boarding. Then seat selection. By 2005, Ryanair was generating over 15 percent of its revenue from ancillary fees — a number that would climb to over 30 percent by 2015. And crucially, their base fares were so low that customers felt like they were getting a deal. Luna: That's the genius of it. The base fare becomes the anchor. You see $49.99 to London and you're hooked. By the time you add the bags and the seat, you're still paying less than the legacy carrier's all-in fare — or so you tell yourself. Lucas: The psychology is powerful. Behavioral economists call it 'base fare anchoring.' The low headline price sets a reference point, and every add-on feels like an optional upgrade rather than a mandatory fee. That framing is everything. Luna: But it wasn't just Ryanair. The model spread to Spirit, Frontier, Allegiant in the US. And then, slowly, the legacy carriers took notice. Lucas: Delta, United, American — they watched their low-cost competitors capture market share while still turning a profit. By the late 2000s, after the financial crisis, they started unbundling too. First checked bags in 2008. Then carry-on fees for basic economy. Then seat selection. By 2015, almost every major US airline had a basic economy fare that stripped out everything but the seat. Luna: And the numbers are staggering. According to IdeaWorksCompany, global airline ancillary revenue was about $2 billion in 2007. By 2019, it was over $100 billion. Even during the pandemic, when travel collapsed, fees remained a critical profit center. Lucas: Let's pause on that number: 100 billion dollars. That's larger than the GDP of some countries. And it's almost pure profit margin because the cost of adding a bag to a flight is negligible compared to the fee charged. Luna: But here's the thing — consumers didn't just accept it. There was backlash. Remember the 'bag rage' headlines? The hidden-fee lawsuits? Lucas: Right. The Department of Transportation actually proposed rules requiring airlines to disclose fees upfront. Some carriers like Southwest used the all-inclusive model as a competitive differentiator — 'bags fly free' was their slogan for years. Luna: But even Southwest eventually gave in. In 2024, they introduced basic economy fares with limited baggage. They had to, because passengers were comparison-shopping on price and Southwest's full-fare ticket looked expensive next to a stripped-down competitor's base fare. Lucas: That's the tragedy of the commons in pricing. Once one player unbundles, everyone feels forced to follow, even if it hurts customer satisfaction. And the data shows satisfaction scores for airlines have been declining for years, even as revenue climbs. Luna: So what's the lesson for other industries? Because we're seeing this model everywhere now — hotels with resort fees, car rentals with insurance add-ons, even software with freemium tiers. Lucas: The playbook is simple but powerful. First, identify a core product that can be sold at a low base price. Second, break out features that were previously included and price them separately. Third, communicate the base price aggressively in advertising. And fourth, make the add-ons feel optional even when they're nearly mandatory. Luna: Which brings us to the hotel industry. You book a room for $150 a night, and then at checkout there's a $35 'resort fee' that covers the pool, gym, and Wi-Fi — things you assumed were included. That's straight from the airline playbook. Lucas: Yeah, let's talk about that. Lucas: If these conversations have moved your work forward in some small way — maybe helped you think about pricing differently — listener support is what keeps this show ad-free and independent. Luna: Yeah, it makes a real difference. If you're able, you can find us at buy me a coffee dot com slash fexingo. Lucas: And now back to resort fees. So hotels started adding these mandatory fees in the 2000s, but they exploded after 2015. The average resort fee in Las Vegas is now over $50 a night. And like airline fees, they're often not included in the initial price you see on booking sites. Luna: The FTC actually sued several hotel companies over this practice. And some states have passed laws requiring all-in pricing. But the industry keeps finding workarounds. Lucas: Because the economics are too tempting. If you're a hotel competing on price, a $150 room with a hidden $50 fee looks better than a $200 room with no fee, even though the total is the same. And once one hotel in a market does it, others follow. Luna: So the airline model has basically colonized adjacent industries. Where do you see it going next? Lucas: I think subscription software is the next frontier. You've got companies like Zoom and Slack offering a low entry-level price, then charging for things like recording storage, admin controls, or integrations — things that used to be included. It's the same unbundling logic. Luna: But there's a risk, right? If customers feel deceived, they revolt. We saw that with the backlash against hidden resort fees and with the restaurant industry's attempt to add service charges. Lucas: Absolutely. The key is transparency. Ryanair succeeded because their base fare was genuinely lower than alternatives. Customers did the math and felt they won. But when fees feel like a bait and switch — when the base price is misleading — you get regulatory scrutiny and brand damage. Luna: So the airline pricing revolution offers a blueprint, but also a caution. Unbundling can drive massive revenue, but it works best when the customer perceives value at each step. Lucas: Exactly. The airlines that do it best — I'd argue Delta and Southwest, ironically — have figured out how to make add-ons feel like enhancements, not penalties. If you want a checked bag, you pay for it, but you also get priority boarding and a sense of control. Luna: Control. That's a big part of it. The customer feels like they're building their own travel experience, even if they end up paying more than the old all-in price. Lucas: Right. And when you look at the data on willingness to pay, people consistently overestimate how much they'll save by stripping out add-ons. They think they'll travel light and skip the seat selection, but they rarely do. Luna: So the pricing structure exploits a kind of optimism bias. And that's why it's so profitable. Lucas: Yeah, I think that's the bottom line. The airline industry didn't just change what we pay to fly — it changed how we think about price. And every other industry is taking notes. Luna: So what's next? Will we see a reversal? Some kind of all-in pricing movement? Lucas: I doubt it, honestly. The genie is out of the bottle. Too many companies have seen the revenue lift. But I think we'll see smarter disclosure — regulators will force it — and maybe a premium market for all-in pricing, the way some airlines offer business class where everything is included. But for the mass market, unbundling is here to stay. Luna: It's a fascinating case study in how a pricing innovation can reshape an entire industry — and then spread far beyond it. Lucas: It really is. And the next time you're clicking through a checkout screen, adding a carry-on, you'll know exactly why that fee exists. Luna: And whether you feel okay about it. Lucas: Exactly.