Deterministic Price Setting Rules to Guarantee Profitability of Unbundling in the Airline Industry

Unbundling the traditional airfare is one of the airline industry’s practices to generate ancillary revenue in its struggle for profitability. However, unbundling might just as well negatively affect profit. In this paper deterministic price setting rules are established to guarantee profitability of unbundling irrespective of what product is unbundled. By comparing unbundling to a conventional price change, the least profitable scenarios of unbundling can be solved using the economic principle of price elasticity. The solution can be optimized dichotomously for profitability – profit guaranteed versus not guaranteed – by setting the unbundled prices such that the least profitable scenarios would still be profitable; profitability would then be guaranteed for any other scenario. The price setting rules this method renders are incorporated in a decision tree model and corresponding procedure for airline managers. As opposed to what customer research can produce, the model and corresponding procedure are generally applicable