Freemium: What role will it play in the airline industry?
Freemium has been used as a successful business model for over a decade, mainly in the technology sector. Companies such as Dropbox, Skype and Spotify have used the freemium business model to introduce their services to potential customers and have gone on to become some of the most utilised – and profitable – companies in the world. With these success stories in mind, airlines are taking another look at the possible role of freemium airfares in the travel industry.
What is a freemium?
Under a freemium business model, consumers are provided with a base product (usually software or an application) for free and offered more advanced services or additional features at an additional charge. By removing the cost of a product, potential consumers are often much more willing to utilise it and pay to upgrade to unlock more features. While most airlines offer consumers the ability to upgrade their flights through ancillary services such as seat selection, extra baggage fees and other on-board amenities, few have gone as far as offering free – or nearly free – base airfares outside of special promotions and sales.
Freemium business model challenges
One of the challenges that airlines face in offering freemium airfares is the taxes and duties that they must pay on each passenger. Traditionally, these costs have been passed on to customers within the price of the fare, making the possibility of offering completely free airfares nearly impossible. As a way to decrease fares, some carriers have proposed that if airports reduced or removed these taxes and duties, airlines would be able to offer even lower – or free – airfares to passengers. By offering these heavily reduced airfares to consumers, airlines would be able to attract a substantially larger number of passengers to smaller regional airports, which would, in turn, increase the revenue of both the airports and the businesses within it.
Freemium and customer experience
During the recent World Aviation Festival in London, Wizz Air CDO Joel Goldberg noted, “While I am not sure if we’ll ever get to freemium airfares, we have a tremendous opportunity to be creative and to be a provider of an experience.” While the goal of offering completely free airfares have not yet become a reality, many carriers are looking at ways to open air travel up to a broader audience. Low-cost carriers such as Spirit Airlines, Frontier, Wizz Air and Ryanair are offering increasingly lower base airfares on select flights that cover the basic operating costs for transporting the passenger. While these airfares are not free, they are low enough to entice consumers to purchase additional upgrades and services and still get a bargain. This strategy of offering partial-freemiums appears to be working well, with these carriers seeing between 27 to 46 percent of their total revenues resulting from ancillary charges.
This partial freemium business model may begin to play a more prominent role in the airline industry, but with some restrictions. As Infare’s CCO Harald Eisenaecher commented during the 2019 World Aviation Festival, “I can see a partial freemium model [working] for low-cost carriers, but unless ancillaries are priced differently, you may see only five or so seats under this model, not 139.” Only time will tell if freemium will become a reality. As both airlines and airports continue to look for new ways to stay competitive in a shifting economy, freemium business model is again becoming a topic of conversation.