According to ATW, US budget airline Spirit is going to charge for carry-on luggage that can’t fit under a seat (as well as charging for checked luggage), and Ryanair is thinking about charging to use the toilet on short-haul flights.

Both are pursuing a relatively extreme ‘unbundling’ strategy, where services normally sold together for a single price (i.e. a seat on a plane and the ability to use the toilet) are now priced separately. When does it make sense to bundle and when should a business un-bundle, to maximise its profits?

If you are selling A and B, then you should bundle them if there are some people who want to pay a lot for A and not much for B, and some other people who want to pay a lot for B and not much for A. But you can’t distinguish which consumer is of which type, so you face a lot of variability in the demand for your products. You can reduce this variability by bundling A and B together and selling them both for a single price. There is less variability in the demand for the bundle than there is in the demand for A and B separately, so you can make more profits. (Roughly speaking the demand for the bundle is less elastic than the demand for A and B separately).

But does a seat on a plane and carry-on luggage have this feature? No — people who are willing to pay a lot for a seat are probably willing to pay a lot for their luggage too, and people who are not willing to pay much for a seat are not willing to pay much for luggage. By bundling them together you don’t really reduce any variability in demand, and so can’t extract more revenues. Better to un-bundle them and extract more revenue from those who want to bring baggage while also attracting customers who don’t want to pay much but are willing to give up their baggage.