This is part two of a two-part series. Read part one, Airline “Pricing” versus “Revenue Management” – Are These Processes Silo’ed?
The most recent issue of JRPM features multiple articles on the relationship between “pricing” and “revenue [or inventory] management.” In my experience at U.S. airlines, “inventory management” received much more attention than pricing (rules, etc.).
At international airlines, however, pricing seemed much more important than relying on algorithms to optimize seat allocations. Obviously, the two roles work together.
Increasingly, Ancillary Pricing offers yet a third process for customer segmentation and revenue optimization. Increasingly, airlines need to integrate and align all three processes.
For a crash course on ancillaries, read What Are Airline Ancillaries & How Are They Classified?
Consider Customer Segmentation
Ancillary by definition is a customer segmentation tool. Bags, seat assignments, priority boarding – every ancillary choice represents an opportunity to drive more revenue.
"One airline reports that average ancillary revenue increases with the base fare – that is, those same customers who are willing to pay more for the flight itself also tend to select more ancillary features."
Select passengers are willing to pay for certain specific incremental service features while others, who do not value those features as much, can go without.
One airline reports that average ancillary revenue increases with the base fare – that is, those same customers who are willing to pay more for the flight itself also tend to select more ancillary features. In any case, as ultra-low cost carriers like to say, their customers only pay for the features they choose.
Currently, Pricing and Revenue Management are at odds when Pricing is both too granular (and RM ignores their segmentation recommendation) and not granular enough (when RM inappropriately combines customer segments with different elasticities). In both of these situations, ancillary pricing can address the gaps.
Mind the Mid-Booking Gap
Many pricing gaps occur in the mid-booking range, from 10 days before departure to 3 weeks before departure. In this mid-booking range, customers can have radically different elasticities since this range includes both business and leisure travelers.
How can ancillary be used to drive higher total fares for business passengers who book in this time range?
"ULCCs have found that a higher carry-on fee than a checked bag fee works well for them – business airlines can find that a high carry-on bag fee, too, will drive a higher total fare for business passengers than for more price sensitive leisure passengers."
Checked bag fees are often paid as much by leisure passengers as by business passengers. Carry-on bag fees, however, can represent a differentiating price tool since business passengers are more likely to be willing to pay for carry-ons.
ULCCs have found that a higher carry-on fee than a checked bag fee works well for them – business airlines can find that a high carry-on bag fee, too, will drive a higher total fare for business passengers than for more price sensitive leisure passengers.
Similarly, seat assignment fees are popular with many leisure passengers – families who want to sit together, for example.
To drive higher revenue per passenger for more price insensitive passengers, airlines charge much more for aisle or window seats than for reserving middle seats; at the extreme middle seats could be free or only a nominal amount. Airlines need to insure families can sit together at a lower total cost.
When it comes to change fees, business travelers tend to value flexibility more. Of course, they can buy the fully refundable tickets but those who book >10 days in advance are clearly trying to avoid the fully-unrestricted fares that may be double the cost.
"Using multiple ancillary-related tools to discriminate between business and leisure passengers who both currently book in the mid-booking period (10 days to 3 weeks before departure) could translate into $50 or more higher total fares for business passengers."
Some airlines offer the option to “buy down” the change fee: $200 may be the default change fee but a fare premium of $35 can bring the change fee down to $50.
Business passengers will more likely purchase the buy-down, adding a premium to the base fare vs. their leisure counterparts.
Using multiple ancillary-related tools to discriminate between business and leisure passengers who both currently book in the mid-booking period (10 days to 3 weeks before departure) could translate into $50 or more higher total fares for business passengers.
If Pricing’s fare rules don’t work well in this booking range and if Inventory Control is inappropriately combining customer segments, ancillary pricing can sometimes make up for it – but relying on checked bag fees and seat fees don’t do it alone.
Airlines need to explore the use of ancillary to supplement their Pricing and RM processes in differentiating between business and leisure passengers in the mid-booking range.
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.