maximizing new sources of revenue in an increasingly ... · - defining ancillary revenues -...
TRANSCRIPT
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
Trends in Pricing, Revenue
Management and Distribution
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
Trends in Pricing, Revenue
Management and Distribution
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)
Trends in Pricing, Revenue
Management and Distribution
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%
Trends in Pricing, Revenue
Management and Distribution
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
AVERAGE USEFULNESS OF PRODUCT ELEMENTS
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
AVERAGE USEFULNESS OF PRODUCT ELEMENTS
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
$ $
$
$
$$
$
Defining Ancillary Revenues
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
Defining Ancillary Revenues
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
Defining Ancillary Revenues
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
Defining Ancillary Revenues
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
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
Groups respective experiences
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
Revenue Management Process and
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
Revenue Management Process and
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
Groups respective experiences
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
?
Pricing and Ancillary Revenues
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
Pricing and Ancillary Revenues
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
Pricing and Ancillary Revenues
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
Revenue Management and
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
Revenue Management and
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
Revenue Management and
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
Groups respective experiences
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
www.intervistas.com