This is the second article in a three part series looking into airline fare bundles, including the opportunities that exist and what's next for the pricing strategy.
Read part 1: Airline Fare Bundles – A Step to Better Meeting Traveler Needs
Read part 2: Airline Fare Bundling – A Pricing Opportunity
I was working at Frontier Airlines when the carrier launched the first branded fares in the U.S. in 2008. We offered three fare bundles representing different packages of amenities. Many airlines had introduced new bag fees and change fees in part in response to new low-cost carriers who boasted of high ancillary revenue.
Frontier sought to make it easier for travelers to book the travel experience that best met their individual traveler needs, without scrolling through multiple ancillary options. We displayed three “bundles” of amenities for each flight to simplify booking in a world of ancillary fees.
Bundles & Buckets
We faced a technical hurdle, however, in our reservation and inventory systems. There was a limit of 26 “buckets” of fare levels built into the revenue management inventory system. The revenue management system called for a limited allocation of seats on the plane to the lowest fares in anticipation of demand for higher fares as the flight date approaches.
The legacy structure allowed up to 26 such price points; Frontier was used to filing fares across the price points so as to apply a fairly granular price-demand curve for each flight. With three bundles, however, the technical constraint – and the recommendation from multiple RM experts — was to streamline the “buckets” and divide them across our product bundles – each bundle would have 5-10 price points for the inventory analysts to use for a total of 26.
"Instead of adopting the traditional RM approach, we filed our lowest Economy fares across all the “buckets” as we had always done, all 26 price points."
We resisted that for multiple reasons:
- Across our network of short and long hauls, domestic and international, nonstop and connecting itineraries, and wide spectrum of competitive arenas, we would have had to eliminate some of the “buckets” we had been using. We considered this a high cost given our network if, instead of 26 fares for our economy product, for example, we would cut it back to ten price points.
- We would have to transform our booking demand history — which formed the basis for forecasting — into “products” and separately forecast Basic Economy, Economy, and Premium Economy by market. Forecasting each product separately, too, would mean our lowest priced bundle would likely no longer be offered as the flight filled up, meaning not all customers would see the same choices.
- Finally, travelers would see the prices between products change dramatically. The upsell from Economy to Economy Plus might begin at $150 but fall to $30 as each Economy “bucket” filled up. Such a variance in fare differentials was not part of our vision and would confuse travelers who sought the premium “bundles.”
Instead of adopting the traditional RM approach, we filed our lowest Economy fares across all the “buckets” as we had always done, all 26 price points. We then separately filed associated sell-up fares in the same 26 buckets, each with a fixed premium. Economy Plus was $30 higher; Premium Economy was $75 higher. Customers saw all three product bundles with the same premiums in every market.
United's Bundling Strategy
United Airlines now offers product “bundles” just as Frontier introduced more than a decade ago. And, typically, United displays 3 or 4 different bundles for each flight. But, across its broad network, United now has 22 such bundles. United does vary the amenities in the bundles somewhat – Economy may include a free checked bag in one market and not in another.
The largest commercial opportunity from having 22 bundles, however, may lie in facilitating pricing differences between the products in different markets. United offers an upsell to “Economy” in most markets that is fully refundable; the fare premium for such refundability, however, isn’t a fixed amount. Some of the unique new “bundles” United defines are actually the same “products” – the same travel experience, the same amenities – but they entail a different upsell premium in different markets.
"What United’s bundled fares demonstrates is that amenities, too, have varying price elasticity across markets."
Refundability may drive a $50 premium in some markets but a $60 or $70 premium in other markets. In some long haul international markets, in fact, refundability may be over $1,000 higher. Having different premiums offered in different markets reflects United’s assessment of travelers’ “willingness to pay” for refundability by market and entity.
Differences in price elasticity across customer segments is fundamental to airline revenue management. In some markets, travelers may see base fares of $79 available a month in advance, luring highly price sensitive leisure travelers, while in the same market, the fare may rise to $500 or more in the days before the flight, targeting much less price sensitive business travelers. Such “complexity” has characterized airline pricing for decades.
What United’s bundled fares demonstrates is that amenities, too, have varying price elasticity across markets. United applies a new science to refundability in its use of 22 “bundles.” United has retained simplicity (3-4 fares displayed per market) while adapting the desired variation in both the bundling and the upsell fare premiums across their network. United is leading the way in using bundling to leverage pricing opportunities across its broad network.
Tom Bacon is an airline industry consultant based in Denver, Colorado. With 30 years experience in a variety of travel companies and business situations, he has a track record of dramatically improving profitability through innovative revenue strategies.