maximizing new sources of revenue in an increasingly ... · - defining ancillary revenues -...

strategic

transportation

& tourism

solutions

Maximizing new sources of revenue in an

increasingly competitive airline industry

Dr Emre Serpen Executive Vice president

InterVISTAS Consulting Group

March 22, 2011

Trends in Pricing, Revenue

Management and Distribution

1

Examining the evolving trends in the practice

and science of airline pricing and revenue

management as background to

understanding the implications of increasing

ancillary revenues

Real-time

Availability

ProcessingComprehensive

Competitive

Fare Monitoring

Real-time

Competitive

Fare Availability

Advanced

Customer

Segmentation Expanded

Distribution

Channels

Feature Rich

Distribution

Program

1300 - 1315 Expectations and workshop review

1315 - 1330 Industry Outlook

13 30 - 1345 Market changes and the impact on pricing and revenue management

1345 - 1500 Ancillary Revenues

- Trends PRM & Distribution

- Defining Ancillary revenues

- Processes & Tools & Implications

- Ancillary revenues in PRM decision making

1500: 15:15 Coffee

1515- 1630 Group Discussion – learning's on maximising ancillary revenues

1630 - 1700 Improvements in Pricing and Revenue Management -Planning. Executing and Measuring the revenue

1700 - 1720 Group discussion - learning’s

1720 – 1730 Expectations Review

2



Feature Rich Distribution

Ability to price and sell ancillary revenues

Surcharges

Service elements

Seat selection, FFP eligibility, Meals, Baggage, Lounge access, etc.

Ancillary products

Car rentals, Insurance, Hotels

ATPCO Optional Services

Directed Sales

Targeted offerings based on

Fare

Origin and Destination

Length of Stay

Party Size

Leverage opportunity to up-sell

3

Improvements in distribution systems support the sale of expanded

products but enable the airlines to target product features appropriate

to the individual customer



4

ATPCO Optional Services (Sample of services as of May 2009)Code Group Commercial Name Industry

Sub-code

Air Transport Seat Assignments Aisle Seat Exit Row OA5

Window Seat Exit Row OA6

Center Seat Exit Row OA7

Seat Assignment OB5

Sleeper Berth OB6

Premium Seating OB8

Non-air Services Ground Transportation Bus/Motorcoach OBM

Car Rental OBN

Hotel Accomodation OBO

Land Tour OBP

Train/Rail OBQ

Transfer OBR

Baggage Baggage First Check Bag OCC

Second Check Bag OCD

Third Check Bag OCE

Baggage Delivery OCN

Small Sporting Equipment OB9

Medium Sporting Equipment OCA

Large Sporting Equipment OCB

Financial Services Travel Services Trip Insurance OBG

Airport Services Lounge Executive Lounge OAG

Lounge Access OBX

Merchandise Store Adult Polo Shirt - Small OBB

Adult Polo Shirt - Medium OBC

Adult Polo Shirt - Large OBD

Toy Airplane OBF

Inflight Services Meal/Beverage Continental Breakfast OAJ

Dinner OAK

Lunch OAP

Snack OAT

Alcoholic Drink OAV

Non-alcoholic Drink OAW

Inflight Entertainment Fun Pack OAC

Pillow/Blanket OAD

Headset OAE

Video Games OAF

Inflight Entertainment OBI

Internet Access OCLSource: ATPCO Optional Services Industry Sub-codes , Updated 12 May, 2009

ATPCO Optional Services

provide a central platform

for the distribution of

ancillary revenue products

at the time of ticketing and

reservations through the

Global Distribution Systems

Optional Services can be

configured independently by

flight, route, fare type,

season, and customer type

(age, ffp status)



Expanded Distribution

Fuller function airline websites

Code share and interline services

Multi-leg and open-jaw itineraries and pricing

One-way and return pricing

Expanded search and itinerary options

Third party pricing portals

Kayak, SkyBus

Online travel agencies

Incorporate robotic search and pricing tools

Discount web-sites

Priceline, Hotwire5

Customers have full

information on all product

offerings available and

access to systems that

direct them to the lowest

price

Trends in Pricing and Revenue

Management

Competitive Pricing Systems

Advent of robust systems to monitor competitors’ published fares across a broad network of city pairs and fare classes

SITA Insight

Competitive Fare Availability

Robotic monitoring of competitor fare availability on flight and departure date basis

QL2

Addition of Pricing Heuristics to Revenue Management Systems

Fare availability and class authorization incorporate competitive fare differentials

6

Airlines have better tools to ensure price competitiveness with respect

to both published fares and fare class availability

Track segment performance, traditional

methods no longer sufficient

0

5,000

10,000

15,000

20,000

25,000

CLIENT Pax

COMPETITOR Pax

2003 2004CLIENT C Pax 185,330 125,721 -32%

COMPETITOR C Pax 211,501 168,539 -20%

Total 396,831 294,260 -26%

CLIENT Share 47% 43% -4%



Real-time Availability Processing

Fare availability evaluated in real time by systems external to the hosted reservation system

Sabre Availability Manager

PROS Real-time Dynamic Pricing

Amadeus – Altea Availability

Application of complex rules to evaluate the value of the reservation request versus displaced seat cost (bid-price)

Increased Customer Segmentation

Application of “customer-choice” models and elasticity analysis to better understand customer behaviour

Product offerings based around fare families that let the customer self select the market segment

8

Airlines have mechanisms to better understand and identify a customer’s

market segment and subsequently determine the net revenue value

Importance of product attributes

9

31%

42%

19%

25%

19%

19%

17%

12%

12%

13%

12%

12%

6%

42%

35%

22%

19%

17%

13%

14%

17%

15%

12%

11%

12%

9%

50%

16%

22%

23%

21%

25%

25%

20%

23%

18%

19%

14%

19%

convenient schedule and timing of flights

inexpensive ticket price

broad network of connections

good value for money

trust

own positive experience from the past

service quality onboard

security & safety level of passengers

direct flight, no transfers

efficient service at the airport (check-in, boarding, lounges,

etc.)

punctuality of an airline

possibility to change departure date

prestige, recognised brand

Low cost (N=139)

Economy (N=370)

Business (N=159)

-32.1

-13.7

36.6

-40.0

-5.8

32.8

13.1

-39.0

2.8

25.7

10.5

-51.1

9.1

27.1

14.99.1

Normal check-in at the airport Availability of remote check-in

(SM S, on-line, telephone)

Fast check-in at the airport

(queue for less than 5 minutes)

Self-service check-in at the

airport (no queue)

Traditionalist

Holiday makers

Aspiring

Modern rationalist

AVERAGE USEFULNESS OF PRODUCT ELEMENTS

TICKET AND LUGGAGECHECK-IN

Preferred

Not

preferred

-50.5

8.96.1

-52.0

1.9

23.226.9

35.4

No meals during

the f light

Choice of better-

quality meals

than those

current ly offered

within the t icket

price - on sale

during the f light

Cold meals in the

t icket price

Hot and cold

meals in the

t icket price

No drinks during

the f light

Choice of better-

quality non-

alcoholic and

alcoholic

beverages on

sale during the

f light

Non-alcoholic

beverages in the

t icket price,

alcoholic

beverages for an

extra charge

All alcoholic and

non-alcoholic

beverages in the

t icket price

AVERAGE USEFULNESS

MEALS

Hot and cold meals in the ticket price is by far the preferredoption. Much less attractive is the option of paying forbetter quality meals than those offered in the standardmenu (with the same level of appeal as being served coldmeals only).

DRINKS

What is important here is for there to be drinks freeof charge; the option of alcoholic beverages beingfree as well as non-alcoholic drinks is only slightlypreferred over the ticket price covering just non-alcoholic beverages.

-56.1

2.46.7

-53.4

4.88.7

39.9

-53.7

12.75.9

35.2

-36.7

10.83.6

22.4

46.9

Food - buy on board - with better

quality and choice, not just pay

for what you now get free

Cold and/or hot meal free of

charge

Cold meal free of charge No food available

Traditionalist

Holiday makers

Aspiring

Modern rationalist


MEALSPreferred

Not

preferred

-48.6

-5.3

26.3

-55.0

-2.4

25.5

31.9

-55.4

7.8

22.325.2

-45.0

0.0

20.324.727.5

No drinks available Alcoholic and non-alcoholic drinks -

buy on board - with better quality and

choice

Non alcoholic drinks - free of charge,

alcoholic beverages extra paid

All drinks free of charge

Traditionalist

Holiday makers

Aspiring

Modern rationalist


DRINKSPreferred

Not

preferred

Example: Aggregation

RANKED SEGMENTS AIRLINES CLASS

Total Trad HolMkr Aspiring Mod Rat LCC YCL CCL

Total 815 145 158 310 202 218 460 137

Option to return a ticket without penalties prior to departure TR 4.2 3.9 3.7 5.2 3.3 3.7 4.9 2.8

Option to buy an open ticket (no fixed dates of a flight) TR 4.1 4.2 4.4 4.0 3.9 4.4 4.2 3.5

Option to change already fixed flight date TR 3.3 3.7 3.6 3.2 3.2 3.9 3.1 3.4

Seats with greater space between rows for legs OH 2.3 3.1 1.7 3.0 1.2 2.4 2.5 1.4

Punctuality of an airline (at arrival) PP 2.1 2.6 0.7 3.0 1.5 3.1 1.9 1.3

Option to change a fixed journey route TR 1.9 1.5 1.6 2.4 1.8 2.4 1.7 1.8

Option to re-issue a ticket for a passenger under a different name TR 1.9 1.7 2.2 2.3 1.1 2.8 1.6 1.4

Option to take more hand luggage OA 1.8 1.9 1.1 2.6 0.9 2.9 1.5 0.8

More comfort in seat through amenities such as pillows, blankets, or a better headrests?OH 1.7 1.7 0.7 2.8 0.9 1.8 1.8 1.4

Guarantee of leaving the seat in the middle empty (only window and aisle seats taken - higher travel comfort)OH 1.7 2.9 0.6 2.0 1.3 1.7 1.9 1.2

Option to choose a specific seat on the plane when booking a ticket (e.g. 2A or window seat)OA 1.5 2.4 0.6 1.9 1.0 1.5 1.5 1.5

Guarantee to use fast track at the airport (getting quickly, without queuing through check-in, passport control, security at the entrance to the gate, boarding)AA 1.5 0.6 1.0 1.5 2.5 3.1 0.0 3.8

Hot meal offered during the flight OA 1.4 2.6 1.2 1.6 0.5 1.0 1.7 0.9

Ability to buy a ticket on-line IT 1.4 1.2 0.8 1.9 1.2 2.4 1.1 0.9

Discounts when travelling only with hand luggage OA 1.3 1.0 0.6 2.2 0.9 1.8 1.4 0.4

Ability to check-in at the lounge / gate AA 1.3 1.4 0.5 2.1 0.7 1.4 1.3 1.3

Remote check-in (on-line, phone, SMS) IT 1.3 1.1 0.7 1.6 1.2 1.7 1.1 1.0

Lounge access AA 1.2 1.4 0.9 1.5 1.1 1.3 0.9 2.4

Availability to use self-service check-in machines (no check-in desk) AA 1.2 1.2 0.4 2.0 0.7 1.5 1.2 0.8

E-ticket (electronic ticket, no paper, available for lower price) IT 1.1 0.4 0.9 1.6 1.0 1.7 1.0 0.4

Information about lost baggage via SMS or e-mail IT 1.1 1.1 0.5 1.5 1.0 1.8 0.8 0.8

Facilities for laptop work during the flight (e.g. sockets, shelf for laptop)OH 1.1 0.7 0.3 1.9 0.8 1.7 0.6 1.7

Food offered during the flight OA 1.1 1.5 0.7 1.7 0.3 1.2 1.2 0.7

Guarantee of a fast check-in at the airport without a need to stand in lineAA 1.0 0.2 1.2 1.3 1.0 2.9 0.0 1.5

Immigration fast track after arrival AA 1.0 0.3 0.9 1.3 1.0 2.6 0.0 1.7

Efficient information in case of delay or any other irregularities AA 1.0 1.2 0.4 1.3 0.8 1.6 0.8 0.6

Coffee/ tea offered during the flight OA 0.8 1.0 0.2 1.5 0.2 1.3 0.8 0.3

Place onboard for carry-on-luggage OH 0.8 0.9 0.1 1.5 0.3 1.2 0.7 0.7

Alcoholic beverages offered during the flight OA 0.8 0.8 0.6 1.2 0.2 0.9 0.8 0.4

Cold meal offered during the flight OA 0.7 1.0 0.2 1.3 0.1 1.0 0.7 0.4

Frequent Flyer miles FFP 0.7 0.8 0.1 1.4 0.1 1.1 0.7 0.5

Non-alcoholic beverages offered during the flight OA 0.7 0.8 0.8 1.0 0.1 1.1 0.7 0.4

Available portable DVD OA 0.7 0.8 0.1 1.2 0.4 1.1 0.7 0.3

Priority when getting onboard AA 0.7 1.1 0.2 0.9 0.4 1.0 0.5 0.6

Cabins separated by a curtain OH 0.6 0.2 0.0 1.3 0.4 0.7 0.5 0.9

Ability to buy a food onboard, which is better quality than offered within the ticket priceOA 0.6 0.1 0.2 1.3 0.1 1.0 0.5 0.3

Newspapers offered onboard OA 0.5 0.5 0.0 1.1 0.1 1.1 0.4 0.2

Dedicated bus, which take you to the plane as late as possible when all the passengers already take their placesAA 0.5 0.0 0.5 0.7 0.5 1.2 0.0 1.0

In-flight shopping OA 0.5 0.1 0.1 1.0 0.2 1.1 0.2 0.3

Ability to buy drinks onboard, which is better quality than offered within the ticket priceOA 0.5 0.0 0.3 0.9 0.1 0.7 0.4 0.3

Dedicated bus, which take you to the plane before all the passengers AA 0.4 0.1 0.7 0.5 0.3 1.4 0.0 0.3

An access to a dedicated check-in desk AA 0.4 0.2 0.2 0.7 0.4 1.2 0.0 0.5

Magazines offered onboard OA 0.4 0.4 0.0 0.8 0.0 0.7 0.3 0.1

Dedicated telephone number in call centre - no need to wait in the queueCS 0.4 0.0 0.1 0.9 0.1 1.2 0.0 0.4

This table,

combined/cross-

referenced with the

Personal and

Business travel

attributes

preferences, drives

the product

configuration

recommendations

The product is then

defined across the

customer process

map and the

carrier’s identified

capabilities

Fare Family design driven by research and

willingness to pay

Point-to-Point

RBD

Price

RangePRODUCT ATTRIBUTES FOR EACH FARE FAMILY

PREMIUM Y 100%

PREMIUM B

PREMIUM E 80%

BASIC H

BASIC K

BASIC Q

BASIC T 40%

WOW! V

WOW! W

WOW! L up to 20%

> Seated in dedicated rows at the front of the economy cabin> Last on/first off treatment with CCL pax; dedicated minibus> Priority check-in> Distinct head-rest covers with premium YCL branding> Blocked middle seat on space-available basis> CCL drink service > Upgrade potential> 125% mileage bonus > CCL recognition/recognition club

> Advance Seat Assignment

> 100% mileage credit

> Upper-tier Miles & More get recognition/recognition club

> Eligible for mileage-redemption upgrade

Base economy-cabin product:

> Complimentary snack/meal/non-alcoholic beverages

> Always seated at rear of aircraft

> Only 50% mileage credit

> Ineligible for mileage-redemption upgrade

Business

Class

Premium

economy

Basic

economy

WOW!

Super-

discount

Group work

Groups respective experiences

17

Unbundled

Product Features/

A la carte Pricing

Defining Ancillary Revenue

18

Sale of

Commissionable

Products and

Services

Sale of Retail

Products and

Services

Frequent Flyer

Programs

Revenues, other than core ticket

revenue, that an airline earns either

directly or indirectly from the provision

of air transportation

Defining Ancillary Revenues

Unbundled Product

Baggage charges

Seat selection fee

Premium seats, exit rows, advance seat selection

Meals and beverages

Priority check-in and boarding

Fee for carrier check-in versus self-service check-in

Fee for reservations/ticket office services versus online tools

Credit card charge, debit card charge

Pillows and blankets

In-flight entertainment

Lounge access19

Airlines are finding ever

increasing ways to

unbundle the product or

provide product-related

features or services that a

segment of the market is

willing to pay for

$ $

$

$

$$

$


Commissionable Products Travel Insurance / trip cancellation

insurance

Other travel products Hotel, car rentals, tour packages, ground

transportation

Mobile phone

Advertising On board signage (table trays), in-flight

entertainment, airline web-site.

Retail Products and Services

Duty free

On board shopping

Products sold via the airline’s website

Onboard Internet

20

Carriers are offering an expanding range of travel related products

and services leveraging the distribution channel and other points of

customer interaction


Frequent Flyer Programs

Sale of points to third parties

Credit cards, other retailers,

partner airlines

Sale of points for redemption

Top-up redemption levels

Variable redemption levels for unrestricted inventory

Accelerated reduction of liability

21

In addition to the revenue generated from the sale of points to other

organizations, carriers are increasingly looking at their frequent flyer

points as a form of currency and providing members increased

opportunity to redeem

Total Collections of Fees, 2000-2009

22

Total Collections of Baggage Fees and Reservation Change and Cancellation Fees by U.S. Airlines, 2000-2009 (2010 dollars)

Source: United States Government Accountability Office, July 2010

Ancillary Revenue as a % of Total

Revenue

23Source: The Guide to Ancillary Revenue and a la Carte Pricing, Ideaworks, 2009

22.7%19.3%

15.5%14.8%

14.1%13.0%

11.0%10.3%

9.8%9.6%

9.3%9.1%

8.9%7.9%7.9%

7.4%7.3%

6.7%5.2%

4.8%4.0%

3.8%3.2%

2.5%2.2%

1.5%1.3%1.2%

1.0%0.7%

0.5%0.4%0.3%0.3%

0% 5% 10% 15% 20% 25%

Allegiant

easyjet

Vueling

Aer Lingus

Flybe

American

AirAsia

Delta

Jazeera Airways

Qantas

Air Arabia

Frontier

Air Berlin

US Airways

PIA Pakistan Int.

Iberia

Austrian

Ancillary Revenue in Euros per

Passenger

24Source: The Guide to Ancillary Revenue and a la Carte Pricing, Ideaworks, 2009

€ 20.00€ 17.14

€ 14.97€ 14.75

€ 14.28€ 12.58

€ 11.98€ 11.87

€ 10.84€ 10.55

€ 10.00€ 9.76

€ 9.08€ 8.13

€ 7.61€ 7.10

€ 6.68€ 6.64

€ 6.13€ 5.68

€ 4.84€ 4.18€ 4.15

€ 3.78€ 2.78€ 2.63

€ 1.97€ 1.49

€ 1.16€ 0.91€ 0.90€ 0.85€ 0.77€ 0.62

€ 0.00 € 5.00 € 10.00 € 15.00 € 20.00 € 25.00

AllegiantUnited

Aer Lingus

American

Jet2.com

DeltaJetBlue

Qantas

RyanairVueling

Germanwings

Emirates

easyjetFlybe

Alaskan AirlinesAirTran

Jazeera Airways

SkyEuropeTAM Airlines

Norwegian

Air Arabia

AirAsiaWestJet

South AfricanFrontier

Air Berlin

US AirwaysPIA Pakistan Int. Royal Jordanian

Iberia

LAN AirlinesFinnair

AustrianSouthwest

Defining Ancillary Revenue

Top 5 Airlines’ Performance

As measured in terms of revenue per passenger, the top 5 airlines in 2009 each achieved at least a 50% increase over the top 5 airlines in 2008

As a percentage of revenues, the top airlines saw increases in the order of 5 percentage points

At more than 10 Euros per passenger or 14% of revenue, incremental ancillary revenues represent a price variation equivalent to multiple booking class increases

25

Top 5 Airlines - Ancillary per Passenger

Annual Results 2009 Annual Results 2008

Carrier Euros/

Passenger

Carrier Euros/

Passenger

Allegiant 20.00 € Allegiant 9.95 €

United 17.14 € Vueling 9.55 €

Air Lingus 14.97 € Ryanair 8.52 €

American 14.75 € Aer Lingus 7.35 €

Jet2.Com 14.28 € LTU 7.17 €

Top 5 Airlines - Ancillary Revenue % of Total RevenueAnnual Results 2009 Annual Results 2008

Carrier % Total

Revenue

Carrier % Total

Revenue

Allegiant 22.7% Ryanair 16.2%

Ryanair 19.3% Vueling 14.2%

easyJet 15.5% Allegiant 12.8%

Jet2.Com 14.8% Air Decan 9.0%

Vueling 14.1% easyJet 8.8%

Source: 2009 Guide to Anci l lary Revenue and

a la Carte Pricing by IdeaWorks


Revenue by Product Type

As a product type, frequent flyer programs are one of the largest ancillary revenue sources

Unbundled product features, particularly checked baggage fees are the most significant ancillary revenue resulting directly from the carriage of passengers

Travel Insurance products have not proved to be large ancillary revenue generators

26

Ancillary Revenue by Product Type

Product Type Sample Results (2008/2009 Annualized)

Carrier Revenue per

Passenger (Euros)

Checked Baggage United Airlines 4.36

Frontier 4.06

easyJet 3.56

Early Boarding Southwest 0.68

easyJet 0.50

Reserved Seating WestJet 0.37

Air Berlin 0.28

US Airways 0.06

Qantas 11.87

Alaska Airlines 7.61

United Airlines 7.50

TAM 6.13

Frontier 2.78

Buy-on-board Air Asia 2.06

Travel Insurance easyJet 0.62

Frequent Flier

Programs

Source: 2009 Guide to Anci l lary Revenue and

a la Carte Pricing by IdeaWorks


Airline Benchmarks

27

Carriers Ancillary Revenue

in Euros

As % of Total

Revenue

Euros per

Passenger

Region

Aer Lingus $149,700,000 11.0% $14.97 Europe and Russia

Air Arabia $17,220,000 4.0% $4.84 Middle East and Africa

Air Berlin $75,100,000 2.2% $2.63 Europe and Russia

Air Asia $49,310,520 8.9% $4.18 Asia and the South Pacific

AirTran $174,750,000 9.1% $7.10 The Americas

Alaska Airlines $184,275,000 6.7% $7.61 The Americas

Allegiant Air $85,968,750 22.7% $20.00 The Americas

American $1,650,000,000 9.3% $14.75 The Americas

Austrian $8,200,000 0.3% $0.77 Europe and Russia

easyJet $396,468,000 15.5% $9.08 Europe and Russia

Delta $1,125,000,000 6.6% $10.61 The Americas

Emirates $207,298,140 2.5% $9.76 Middle East and Africa

Finnair $7,000,000 0.3% $0.85 Europe and Russia

Flybe $56,916,000 9.8% $8.13 Europe and Russia

Frontier $33,276,750 3.2% $2.78 The Americas

Germanwings $80,000,000 13.0% $10.00 Europe and Russia

Iberia $26,000,000 0.5% $0.91 Europe and Russia

Jazeera Airways $9,331,002 7.3% $6.68 Middle East and Africa

Jet2.com $52,845,480 14.8% $14.28 Europe and Russia

JetBlue $249,000,000 9.8% $11.36 The Americas

LAN Airlines $11,929,500 0.4% $0.90 The Americas

Northwest $131,250,000 1.3% $1.97 The Americas

Norwegian $51,924,208 7.4% $5.68 Europe and Russia

PIA Pakistan Int. $8,373,753 1.0% $1.49 Asia and the South Pacific

Qantas $458,622,000 5.2% $11.87 Asia and the South Pacific

Royal Jordanian $8,897,040 1.2% $1.16 Middle East and Africa

Ryanair $625,350,240 19.3% $10.84 Europe and Russia

SkyEurope $24,971,000 9.6% $6.64 Europe and Russia

South African $28,122,000 1.5% $3.78 Middle East and Africa

Southwest $54,750,000 0.7% $0.62 The Americas

TAM Airlines $184,888,900 4.8% $6.13 The Americas

United $1,200,000,000 7.9% $17.14 The Americas

US Airways $123,750,000 1.3% $1.97 The Americas

Vueling $62,103,000 14.1% $10.55 Europe and Russia

WestJet $59,334,000 3.8% $4.15 The Americas

The Guide to Ancillary Revenue and a la Carte Pricing by

IdeaWorks © 2009, Page 32.

Data source: Research conducted during April 2009 by

IdeaWorks of the financial statements filed by 34 airlines

worldwide. These airlines disclosed qualifying ancillary

revenue activity in financial statements.

Please refer to individual carrier listings for detail

Airlines Posting Ancillary

Revenue Results

For most recent full-year

period, listed in alphabetical

order

Case Studies: Frontier

28

Define what has value to create the bundles

• Bags

• Pre-assigned seats

• TV

• Standby options

• Miles

• Changeability

• Refundability

• Snacks

• Express security clearance

• Express check-in

• Priority boarding

Selection of final 3 bundles resulted in:

• Economy – the basic, “nothing included” product

• Classic – traditional, bags and seat assignments

• Classic Plus – flexibility but discounted for purchase in

advance

Case Studies: Frontier (continued)

29

Use fare basis code to identify the bundle – fare buckets limits no of fares that can be filed All

touchpoints must read type of ticket purchase – Res, airports, Catering, Inflight, FFP, Kiosks

Economy:

– Priced to attract, basic fare for those who shop by price

• Classic:

– Price equal to the value of the ancillaries in peak demand periods (builds in profit…

people don’t use all ancillary’s their given)

– Flex the pricing depending on the time of year (Classic Sale)… to match up better vs.

competitors economy product when demand is less than capacity.

– Drive passengers to internal channels

• Classic Plus:

– Attractive business product in the market at a better price than the

competition.

– Increased penetration leads to more penetration…

– Surprisingly, strong uptake in leisure markets

mprove LCC ancillary revenue.pdf

../../LOW COST 2010 LONDON/PRESENTATIONS/Improve LCC ancillary revenue.pdf

../../LOW COST 2010 LONDON/PRESENTATIONS/Improve LCC ancillary revenue.pdf

Case Studies: Frontier (continued)

30

Booking Change fees: to differentiate between flexible business fares and inflexible leisure fares

Fees for changing dates and/or routes;

some airlines allow name change

Fees for cancellation of one or more

sectors and no shows

Reservations fees: to encourage people to book on-line direct

Charges for Call Centre or Ticket Office:

equivalent to agents “service fees”

Charges for use of Credit Cards

Baggage related: as a revenue stream and to discourage excess hold baggage

Weight related Excess Baggage fees

(weight related)

Piece related: Fees for all hold baggage

(Ryanair), or for more than one bag

(British Airways)

Fees for sports equipment such as skis or

bicycles

Fuel: to offset increasing fuel costs

Other - extra legroom, priority boarding,

seat preference: extra revenue

Ryanair !

RyanAir !

1. Book your travel online at Ryanair.com. It’s the only authorized booking site and everyone must pay a €5 administration fee.

2.Pay the optional Priority Boarding fee. Pay the €4 fee to be part of the group that boards first and fills the overhead bins.

3.Buy an authorized Samsonite roll-on bag from us for €79.

4.Pay with a MasterCard debit card to waive the €5 booking fee.

5.Mobility costs extra ‒one euro to receive your booking on mobile.

6.You really must check-in online, or it’s a stunning €40 for each boarding pass printed.

7.We prefer you don’t check bags. If you must, we really want you to do it online. €15 for the first bag.

8.You’ll pay more during the summer. Bags during July and August cost €5 more

32

Ryanair !

9.Please don’t check a second bag. It’ll cost you about double the first bag rate.

10.Use the toilet before you fly. We are seriously thinking about removing two toilets and adding more seats. You’ll weigh less and we’ll burn less fuel.

11.But buy from the bar onboard. Goodness, the crew is going to pester you with goods during the flight. Food, drinks, and scratch cards. The crew is paid a commission and some are very eager to earn a few extra euro or quid.

12.Please don’t think about complaining. You can’t call or email us, only mail or fax.

33

Group work


34

Pricing Structures

and Strategies

Pricing and RM Process and Tools

35

Revenue

Management

Decision

Support

Reservation

System Controls

Inventory And

Price Availability

Optimization

A review of current practices,

objectives and tools as a base

for understanding the

relevance of ancillary

revenues

Pricing Systems

Airline Booking

Engine

Availability

Processor

Pricing Process and Tools

36

Traditional Pricing Process

Definition of pricing

structure and strategy

Publishing of fares

Monitoring of market

responses

Monitor competitors’ published

fares

Respond to market and competitive

actions

Core fare level

and range.

Fare rules and

restrictions

consistent with

carrier model

Position versus

competitors and

service quality

Historical

market

performance

Distribution of

fares via tariff

publishing

companies

Distribution of

private fares

Distribution of

website fares

either via

publishing

companies or

alternate price

engine

Use of pricing

systems to

automate fare

publishing

process

Pricing systems

monitor

published

competitive

fares

Airline sales

provided input

on competitors

private fares

Monitoring of

competitor

websites

(manual,

robotic,

3rd party)

Evaluation of

load factors,

advance

bookings, yield,

traffic mix

Determine

market need

Review

competitive

positioning

Define pricing

action

Determine

distribution

channels

Publish fares/

discontinue

fares

Pricing Process and Tools

Traditionally fare focused

Fare structures designed around maximizing ticket

revenue not total revenue

Pricing system focus on tracking competitors’ ticket

fares

Increased packaging of features

Fare family approach

Pay as you go classes versus feature inclusive fare levels

37

Revenue Management Process and

Tools

38

Reservation

System

Schedule,

booking (PNR)

and blight

closeout data

Revenue

Management

Forecaster

Revenue

Management

OptimizerForecast

demand by fare

level, leg,

segment or OD

Revenue

Accounting

Fare

Management

System

Fare Information

Availability

Process

Class

authorization/

availability or

bid-price detailsBid-price

curve

Availability

request

Availability

status

Fare InformationPrice

elasticity data

Competitive

share

information


Tools

Reservation System

Remains the prime source of booking information

from which RM forecaster generates demand

estimate

Flight level or PNR level data

Provides mechanism for implementation of RM

controls

Leg, Segment or OD Control

Interface to availability process for advanced OD

control

39


Tools

Demand Forecasting

Generates forecast of remaining demand by booking class, leg, segment or origin-destination

Forecasting models expanding to consider customer behaviour, price elasticities, and competitive alternatives

Revenue Accounting Systems

Generates average fare by leg, segment or OD by booking class for use in revenue management optimization calculation

Fare Management System

More sophisticated source for fare information that is reflective of published fares and addresses seasonality and day of week

Applicable for OD solutions and used to feed both RM optimizer and availability processors

40

Revenue Management Process

and Tools

Revenue Management Optimizer

Generates availability or bid-price recommendations based on demand levels and anticipated fare or average fare by booking class

Availability Processor

Provides advance features for inventory control not typically available through the reservation system

Improved financial model through more price comparisons of anticipated fare to recommended bid-prices.

Ability to control/limit inventory by OD/booking class and point of sale based on business rules

Ability to bias OD’s, distribution channels and points of sale

Processes availability request from reservations system

Receives request from Res

Prices request and applies any business rules

Compares to the bid price and responds with an availability status

41

Revenue Management Process

and Tools

Revenue management systems have become increasingly sophisticated with

Advanced forecasting tools to address

Customer behaviour in a competitive environment

Purchase behaviour in a less restricted fare environment

Address cross elasticity of demand between fare classes

Improved control tools that allow

More prices customer valuation

More complex availability management based on business

rules and controls

42

Group work


43

Recognizing Ancillary Revenues in

Pricing and RM Decision Making

44

Product

Unbundling and

Demand

Elasticity

Information

Needs and

Understanding

Customer

Behaviour

Impact on Control

Systems

Making better pricing and

revenue management

decisions based on the true

customer value

Customer

Valuation

Pricing and Ancillary Revenues

Unbundling the product

When and what to unbundle?

How to price product elements and a la carte

offerings?

How does unbundling impact pricing actions?

45

?


Economic Theory

Customers are less price elastic with respect to post-purchase charges versus price increases

Addition of $10 airport fee to a $100 fare will decrease demand less than increasing the fare 10%

Customer utility is optimized by allowing the market to choose and pay for the features they want

The greater the utility the greater the demand

Practical Results

United Airlines claims no perceptible loss in traffic with the introduction of baggage fees in 2008

46

Economic theory and anecdotal evidence strongly support the case

for product unbundling


Not all unbundling is good

US Airways’ attempt to charge for non-alcoholic

beverages on board met with employee and customer

backlash and was withdrawn

Product unbundling must consider:

The inconvenience to the customer

The impact on processes and staff

The airlines positioning and brand

47


What to consider when unbundling the product

Is it consistent with the corporate brand?

Do the a la carte features have different values to different segments?

Will unbundling reduce cost?

Can the a la carte product be clearly communicated, sold and implemented?

How will product fees be applied across booking classes and market segments (Frequent flyers for example)?

What is the impact on the preferred customer segment?

What are the competitors doing?

Charging a higher price for an unbundled product leads to loss of market share amongst the segment that does not value the feature

Charging the same price for a broader feature set leads to higher costs but also some market share gain 48

Pricing and Ancillary Revenue

How to price ancillary services?

Need a consistent fare and ancillary revenue strategy

Cost reductions from ancillary revenues suggest

opportunity to lower fares and stimulate demand

Sum of fare and all unbundled products cannot be

inconsistent with current fares

Need market information to evaluate consumer

response

Competitive benchmarks

Test markets

Consumer research

49

Revenue Management and

Ancillary Revenue

Problem

Fare value may no longer accurately reflect the

passenger’s actual value

Purchase of ancillary products will not be consistent

across markets, booking classes, seasons, day of

week, or even date prior to departure

50

When ancillary revenues from direct per-passenger products begin to

reach 10% of the total passenger revenue then traditional revenue

management strategies based on ticket price will not be accurate


Ancillary Revenue

Information Requirements

Carriers need to begin to capture information on the uptake of ancillary revenue products.

What are the factors that affect ancillary revenue per passenger?

Flight leg

OD market

Booking class

Purchase date respective to departure date

Distribution channel

Party size

Point of sale

Information can be collected from

The distribution channels

Departure control systems

Credit card companies

51


Ancillary Revenues

Ancillary Revenue Classifications

Direct passenger fees

Meals, Baggage Fee, Seat Selection Fee, Priority Boarding, etc.

Commissionable products

Insurance, Car Rental, Hotels

Indirect Ancillary Revenues

Advertising

Sale of FFP rewards

Products sold through website independent of air travel choice

52

Revenue Management decision strategies should be based on direct

passenger fees and not on the indirect revenues


Ancillary Revenues

Implementation of Ancillary Revenue-Aware Revenue

Management (Revenue management decision strategies reflect

the true passenger value)

Adjust the average fare to reflect the anticipated net ancillary

revenue for each booking class, OD pair and point of sale

In the case of leg- and segment-RM, this requires and an adjustment to the

fare value tables

In the case of OD revenue management, adjustments can be applied

through rules criteria in the fare management module

If the carrier uses an availability processor, complex rules can be

applied to adjust the fare value calculation based on the anticipated

ancillary revenue and the profile of the availability request.

For example, a party of 4 will likely have a higher probability of checking

bags than a party of one, or a late booking high-yield passenger may be

more likely to purchase priority boarding, check-in or lounge access

53

Contemporary Revenue Management systems provide more tools to

enable the recognition of ancillary revenue potential in the revenue

management decision criteria

Revenue Management and Ancillary

Revenues

54

Average Fare Adjustment MatrixLeg or Segment Revenue Management Control

Route Booking Class

H K N B V U Q

YVR-YYC € 9.10 € 8.00 € 13.40 € 9.40 € 7.10 € 12.00 € 12.80

YVR-YWG € 12.50 € 10.20 € 10.10 € 10.30 € 9.10 € 8.30 € 7.90

YVR-YYZ € 11.30 € 10.30 € 12.70 € 12.80 € 12.20 € 7.80 € 11.90

YVR-LHR € 13.00 € 14.00 € 9.80 € 14.00 € 13.60 € 10.60 € 13.90

…

…

Carriers can develop a matrix of expected ancillary revenue by booking

class, flight let, segment or OD. Average fares in the RMS can be adjusted

by the matrix values to reflect the true anticipated revenue

Revenue Management and Ancillary

Revenues

55

Average Fare Adjustment MatrixOD Control with Availability Processor

Route Booking Class

H K N B V U Q

YVR-YYC YVR Weekday 1 € 9.10 € 8.00 € 13.40 € 9.40 € 7.10 € 12.00 € 12.80

YVR-YWG YVR Weekday 2 € 12.50 € 10.20 € 10.10 € 10.30 € 9.10 € 8.30 € 7.90

YVR-YYZ YYZ Weekday 3 € 11.30 € 10.30 € 12.70 € 12.80 € 12.20 € 7.80 € 11.90

YVR-LHR LHR Weekend 4 € 13.00 € 14.00 € 9.80 € 14.00 € 13.60 € 10.60 € 13.90

…

…

Point of

Sale

Day Of

Week

Party

Size

Carriers can develop profiles based on specific characteristics to more

precisely estimate the value of any given booking requests. Rules can be

defined in the availability processor to bias availability in fare of passengers

more likely to purchase ancillary products.

Conclusions

A focus on ancillary revenues provides carriers with the ability

to generate incremental revenue while offering the consumer

the flexibility to purchase only the product features they need

Unbundling the air transport product has proved to be revenue-

positive and cost advantageous. If done right, the customer

benefits

Pricing and Revenue Management practices need to adapt to

the increased share of the customer’s net contribution that is

not reflected in the ticket price

Airlines need to implement systems to track ancillary revenue

purchases by market segment type so that these products can

be appropriately priced and inventory controlled

Advances in pricing systems and revenue management

systems lend themselves to addressing the implications of

increased ancillary revenues56

Group work


57

Consolidate & Prioritise

Opportunities to leverage Better Ancillary Revenues

Opportunities

Priorities (Bang for the Buck)

Barriers and suggested next steps

Mindset

Technology

Process

Other58

strategic

transportation

& tourism

solutions

Thank You

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