By Carl Coates
March 4, 2026 — Why does checking a 25lb bag cost $35, but flying your entire body costs $199? It’s all about unbundling — and airlines have turned it into an art form.
There are moments when reality steps into our path and refuses to be ignored. We imagine life unfolding according to our plans, dreams, or imagination, but delusion has a short shelf life. When it expires, the truth can hit harder than we’d like.
I always think of a scene from the classic holiday movie A Christmas Story, when the main character, Ralphie, collects enough proofs of purchase by drinking copious amounts of Ovaltine to qualify for a special prize. The prize is a secret decoder pin that promotes him to “insider status” for his favorite radio show, which is sponsored by, as it happens, the chocolate-flavored Ovaltine. At the end of every episode of his favorite radio kids show, you see, the main character, Little Orphan Annie, sends “members” of her Secret Society a message that only those who have the decoder pin can receive. The excitement of receiving the first secret message is diluted as Ralphie realizes it’s an advertisement (“Be sure to drink your Ovaltine”). His commitment to drinking Ovaltine by the flagon to get his secret decoder pin is jarringly put into perspective. Knocked a bit sideways by reality, he realizes that he is enlightened, disappointed, and transformed.
We all know in our hearts that when things sound too good to be true, they often are. We all think we’ve “learned our lesson” after such experiences and can face the world again with some hard-won wisdom. And, yet…
Searching for the best bargain
A few years ago, I found a great deal for airline tickets to take my family to visit my mom. Such a deal! It’s not cheap to fly 4 people across the country and these tickets seemed beyond budget friendly. I imagined the money I was saving, the warm weather I would be enjoying and the joy Grandma would have seeing her grandkids. The latter two did come true, but the low-cost airline’s fine print derailed my vision of a budget friendly set of tickets.
We paid seat selection fees, luggage fees, carry-on fees before I entered my credit card. Add to those, the extra time costs to wait in line to check the luggage after navigating long security lines because the gate was tucked into a corner of the international terminal, a last minute sign-up for a free “fast lane” pass from a private company so we could get through security and onto the gate on time, thankfully remembering to cancel that free pass subscription service within 14 days, the cost of the frustration of all these unpleasant surprises and…turns out we saved very little money for our tickets and were rewarded with high blood pressure, bickering, and a sweaty sprint to the gate to make our flight. We had experienced unbundling and I had once again shown I was no Homo Economicus.
“Be sure to drink your Ovaltine.”
How does unbundling tap into behavioral economics?
There’s no arguing that airline tickets are less expensive in real terms compared to 50 years ago, thanks to the removal of the Civil Aeronautics Board and its constraints on competition. At the time airlines tickets were all-inclusive and were not the basis of competition. Maverick airlines pushed competitive pricing further, and we owe airlines like Laker Airways, People’s Express, Southwest, Spirit, and ATA for making air travel more affordable and more available.
Following Spirit’s lead in 2006, airlines have introduced a pricing strategy known as unbundling. This strategy is when a company separates what was previously sold as a single all-inclusive product into multiple components priced and sold separately. The result for consumers could be a great deal or it could be similar to my own experience.
How you might win.
You can come out ahead if you’re disciplined, genuinely (very) minimal in your needs, and willing to do the challenging calculations that an unbundled pricing structure creates. In other words, spartan flying needs and a rational mindset could lead to an increase in consumer surplus, an increase in efficiency, and a reduction in deadweight loss. And more money in your pocket.
Watch E4E’s Consumer Surplus video to learn more about this concept.
Why you might lose.
An unbundled pricing structure makes the overall cost less obvious. Research shows consumers systematically underestimate total costs when prices are partitioned, which is why airlines advertise the base fare prominently and reveal the fees later.
This is known as the drip pricing effect: where costs are revealed sequentially through what is known as a booking funnel, which further undermines rational comparison shopping. Even online travel agencies who provide a matrix for comparison shopping still end up moving customers to a booking funnel. Unbundling can be frustrating and illustrates one of the four principles of Behavioral Economics: When people make choices, they tend to notice what’s most noticeable or obvious.
For air travel, the price of the ticket itself is the most noticeable or obvious piece of information. Furthermore, airlines, as with many other firms, will always try and move consumers closer to a price that matches their maximum valuation. This effectively reduces or eliminates consumer surplus. Though it’s true that unbundling leads to an economically efficient outcome as the price is more likely to equal one’s willingness-to-pay, that feels like so much fiddle-faddle as you enter your credit card information for a purchase that is quite a bit higher than the one you originally thought you were making.
Does unbundling undermine the ability for consumers to make informed comparisons?
Until recently, there was real information asymmetry and search cost advantages that tipped the scales in favor of airlines. Hidden fees or shrouded attributes as explored by Gabaix and Laibson (2006) were more common until a 2024 US Department of Transportation rule added transparency. These shrouded attributes were “prices or features whose existence is not readily apparent to consumers”. Gabaix and Laibson’s model showed that even in competitive markets, firms have no incentive to deshroud yet-to-be revealed fees because doing so does not attract enough sophisticated consumers to offset the lost revenue from naive ones.
Paradoxically, airlines leverage information asymmetry in both directions. In essence, the low base fare generates a moment of pleasure (“what a deal!”), and each subsequent fee generates a small pain — but by then you’re committed. This smacks of both the sunk cost fallacy and escalation of commitment: having already invested time in the booking process, you’re psychologically less likely to abandon your shopping cart and start over, even when the total price now exceeds what another airline may charge.
Because of the allure of the initial (seemingly low) price of the ticket we humans find ourselves funneled towards a higher final price, devoid of consumer surplus and frequently frustrated. We can learn much about modern marketing, make better choices, and become savvier consumers by understanding behavioral economics.
Flight attendants, cross-check for landing.
Ladies and gentlemen, this is your captain speaking. We have started our descent, and we expect to land at Reality Check airport in 15 minutes. Thank you for choosing Unbundling Airlines for your travel needs. On behalf of the flight crew, and my co-pilot, Lieutenant Rational Actor, we hope you enjoyed your flight and are leaving us a bit more world-wise as you head out to your final destination.
And be sure to drink your Ovaltine.