Maximizing New Sources of Revenue in an increasingly Competitive Airline Industry

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 Feature Rich Distribution

Real-time Availability Processing

Comprehensive Competitive Fare Monitoring

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 Advanced Customer Segmentation

Expanded Distribution Channels

Real-time Competitive Fare Availability

1

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 



Ancillary products 

 

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

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

Improvements in distribution systems support the sale of expanded products but enable the airlines to target product features appropriate to the individual customer

3

Trends in Pricing, Revenue Management and Distribution ATPCO Optional Services (Sample of services as of May 2009) Code Air Transport

Non-air Services

Baggage

Financial Services Airport Services Merchandise

Inflight Services

Group

Commercial Name

Industry Sub-code 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 Ground Transportation Bus/Motorcoach OBM Car Rental OBN Hotel Accomodation OBO Land Tour OBP Train/Rail OBQ Transfer OBR 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 Travel Services Trip Insurance OBG Lounge Executive Lounge OAG Lounge Access OBX Store Adult Polo Shirt - Small OBB Adult Polo Shirt - Medium OBC Adult Polo Shirt - Large OBD Toy Airplane OBF 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 OCL

Source: ATPCO Opti ona l Servi ces Indus try Sub-codes , Upda ted 12 Ma y, 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)

4

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 



Online travel agencies 



Kayak, SkyBus Incorporate robotic search and pricing tools

Discount web-sites 

Customers have full information on all product offerings available and access to systems that direct them to the lowest price

Priceline, Hotwire 5

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 



Competitive Fare Availability 

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



SITA Insight

QL2

Addition of Pricing Heuristics to Revenue Management Systems 

Fare availability and class authorization incorporate competitive fare differentials

Airlines have better tools to ensure price competitiveness with respect to both published fares and fare class availability 6

Track segment performance, traditional methods no longer sufficient 25,000 CLIENT Pax COMPETITOR Pax 20,000

15,000

10,000

5,000

0

CLIENT

C Pax COMPETITOR C Pax Total CLIENT Share

2003 185,330 211,501 396,831 47%

2004 125,721 168,539 294,260 43%

-32% -20% -26% -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

Airlines have mechanisms to better understand and identify a customer’s market segment and subsequently determine the net revenue value 8

Importance of product attributes 31%

convenient schedule and timing of flights inexpensive ticket price

19% 17% 21%

trust

19% 13% 25% 17% 14%

service quality onboard

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

42%

25% 19% 23%

good value for money

security & safety level of passengers

50%

19% 22% 22%

broad network of connections

own positive experience from the past

35%

16%

42%

25%

12% 17% 20% 12% 15%

23%

13% 12% 18% 12% 11%

19%

12% 12% 14% 6% 9%

Low cost (N=139) Economy (N=370) Business (N=159)

19%

9

AVERAGE USEFULNESS OF PRODUCT ELEMENTS TICKET AND LUGGAGE CHECK-IN

Preferred

36.6 32.8 25.727.1 9.1 13.110.514.9

9.1 2.8

-5.8 -13.7

-32.1

Traditionalist Holiday makers Aspiring Modern rationalist

-40.0-39.0 Not preferred

-51.1

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)

AVERAGE USEFULNESS

MEALS Hot and cold meals in the ticket price is by far the preferred option. Much less attractive is the option of paying for better quality meals than those offered in the standard menu (with the same level of appeal as being served cold meals only).

35.4

DRINKS What is important here is for there to be drinks free of charge; the option of alcoholic beverages being free as well as non-alcoholic drinks is only slightly preferred over the ticket price covering just nonalcoholic beverages.

23.2 8.9

6.1

1.9

-50.5 No meals during Choice of better- Cold meals in the the flight quality meals ticket price than those currently offered within the ticket price - on sale during the flight

26.9

-52.0 Hot and cold meals in the ticket price

No drinks during Choice of better- Non-alcoholic All alcoholic and the flight quality nonbeverages in the non-alcoholic alcoholic and ticket price, beverages in the alcoholic alcoholic ticket price beverages on beverages for an sale during the extra charge flight

AVERAGE USEFULNESS OF PRODUCT ELEMENTS MEALS Preferred

46.9 39.9 35.2 22.4 2.4 4.8

12.710.8

6.7 8.7 5.9 3.6

Traditionalist Holiday makers Aspiring Modern rationalist

-36.7 -56.1-53.4-53.7 Not preferred 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

AVERAGE USEFULNESS OF PRODUCT ELEMENTS DRINKS Preferred

31.9 26.3 25.5

22.3 20.3

27.5

25.2 24.7

7.8 0.0

-5.3

-45.0 -48.6 Not -55.0-55.4 preferred No drinks available

-2.4

Traditionalist Holiday makers Aspiring Modern rationalist

Alcoholic and non-alcoholic drinks - Non alcoholic drinks - free of charge, buy on board - with better quality and alcoholic beverages extra paid choice

All drinks free of charge

Example: Aggregation RANKED

SEGMENTS Total

Total

815

Trad 145

AIRLINES CLASS

HolMkr Aspiring Mod Rat 158

310

202

LCC

YCL

218

Option to return a ticket without penalties prior to departure TR 4.2 3.9 3.7 5.2 3.3 3.7 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 Option to change already fixed flight date TR 3.3 3.7 3.6 3.2 3.2 3.9 Seats with greater space between rows for legs OH 2.3 3.1 1.7 3.0 1.2 2.4 Punctuality of an airline (at arrival) PP 2.1 2.6 0.7 3.0 1.5 3.1 Option to change a fixed journey route TR 1.9 1.5 1.6 2.4 1.8 2.4 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 Option to take more hand luggage OA 1.8 1.9 1.1 2.6 0.9 2.9 More comfort in seat through amenities such as pillows, blankets, or a OH better headrests?

1.7 1.7 0.7 2.8 0.9 1.8 Guarantee of leaving the seat in the middle empty (only window and aisle OHseats 1.7 taken - higher 2.9 travel comfort) 0.6 2.0 1.3 1.7 Option to choose a specific seat on the plane when booking a ticket (e.g.

OA 2A or1.5 window seat) 2.4 0.6 1.9 1.0 1.5 Guarantee to use fast track at the airport (getting quickly, without queuing AA through 1.5check-in, passport 0.6 control, 1.0 security 1.5 at the 2.5entrance to the 3.1 gate, Hot meal offered during the flight OA 1.4 2.6 1.2 1.6 0.5 1.0 Ability to buy a ticket on-line IT 1.4 1.2 0.8 1.9 1.2 2.4 Discounts when travelling only with hand luggage OA 1.3 1.0 0.6 2.2 0.9 1.8 Ability to check-in at the lounge / gate AA 1.3 1.4 0.5 2.1 0.7 1.4 Remote check-in (on-line, phone, SMS) IT 1.3 1.1 0.7 1.6 1.2 1.7 Lounge access AA 1.2 1.4 0.9 1.5 1.1 1.3 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 E-ticket (electronic ticket, no paper, available for lower price) IT 1.1 0.4 0.9 1.6 1.0 1.7 Information about lost baggage via SMS or e-mail IT 1.1 1.1 0.5 1.5 1.0 1.8 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 Food offered during the flight OA 1.1 1.5 0.7 1.7 0.3 1.2 Guarantee of a fast check-in at the airport without a need to stand in line AA 1.0 0.2 1.2 1.3 1.0 2.9 Immigration fast track after arrival AA 1.0 0.3 0.9 1.3 1.0 2.6 Efficient information in case of delay or any other irregularities AA 1.0 1.2 0.4 1.3 0.8 1.6 Coffee/ tea offered during the flight OA 0.8 1.0 0.2 1.5 0.2 1.3 Place onboard for carry-on-luggage OH 0.8 0.9 0.1 1.5 0.3 1.2 Alcoholic beverages offered during the flight OA 0.8 0.8 0.6 1.2 0.2 0.9 Cold meal offered during the flight OA 0.7 1.0 0.2 1.3 0.1 1.0 Frequent Flyer miles FFP 0.7 0.8 0.1 1.4 0.1 1.1 Non-alcoholic beverages offered during the flight OA 0.7 0.8 0.8 1.0 0.1 1.1 Available portable DVD OA 0.7 0.8 0.1 1.2 0.4 1.1 Priority when getting onboard AA 0.7 1.1 0.2 0.9 0.4 1.0 Cabins separated by a curtain OH 0.6 0.2 0.0 1.3 0.4 0.7 Ability to buy a food onboard, which is better quality than offered withinOA the ticket 0.6price 0.1 0.2 1.3 0.1 1.0 Newspapers offered onboard OA 0.5 0.5 0.0 1.1 0.1 1.1 Dedicated bus, which take you to the plane as late as possible when allAA the passengers 0.5 already 0.0take their 0.5places 0.7 0.5 1.2 In-flight shopping OA 0.5 0.1 0.1 1.0 0.2 1.1 Ability to buy drinks onboard, which is better quality than offered withinOA the ticket 0.5price 0.0 0.3 0.9 0.1 0.7 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 An access to a dedicated check-in desk AA 0.4 0.2 0.2 0.7 0.4 1.2 Magazines offered onboard OA 0.4 0.4 0.0 0.8 0.0 0.7 Dedicated telephone number in call centre - no need to wait in the queue CS 0.4 0.0 0.1 0.9 0.1 1.2

460

CCL 137

4.9 2.8 4.2 3.5 3.1 3.4 2.5 1.4 1.9 1.3 1.7 1.8 1.6 1.4 1.5 0.8 1.8 1.4 1.9 1.2 1.5 1.5 boarding) 0.0 3.8 1.7 0.9 1.1 0.9 1.4 0.4 1.3 1.3 1.1 1.0 0.9 2.4 1.2 0.8 1.0 0.4 0.8 0.8 0.6 1.7 1.2 0.7 0.0 1.5 0.0 1.7 0.8 0.6 0.8 0.3 0.7 0.7 0.8 0.4 0.7 0.4 0.7 0.5 0.7 0.4 0.7 0.3 0.5 0.6 0.5 0.9 0.5 0.3 0.4 0.2 0.0 1.0 0.2 0.3 0.4 0.3 0.0 0.3 0.0 0.5 0.3 0.1 0.0 0.4

This table, combined/crossreferenced 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

Business Class Premium economy

Basic economy

WOW! Superdiscount

Point-to-Point RBD

Price Range

PR EMIUM

Y

100%

PR EMIUM

B

PR EMIUM

E

BASIC

H

BASIC

K

BASIC

Q

BASIC

T

WOW!

V

WOW!

W

WOW!

L

80%

PRODUCT ATTRIBUTES FOR EACH FARE FAM ILY

> 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 40%

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 up to 20%



Group work



Groups respective experiences

17

Defining Ancillary Revenue

Sale of Commissionable Products and Services

Unbundled Product Features/ A la carte Pricing

Revenues, other than core ticket revenue, that an airline earns either directly or indirectly from the provision of air transportation Frequent Flyer Programs

Sale of Retail Products and Services

18

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 selfservice check-in Fee for reservations/ticket office services versus online tools Credit card charge, debit card charge Pillows and blankets In-flight entertainment Lounge access

$

$

$

$ $

$ 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 19

Defining Ancillary Revenues 

Commissionable Products  

Travel Insurance / trip cancellation insurance Other travel products 

 

Mobile phone Advertising 



Hotel, car rentals, tour packages, ground transportation

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

Carriers are offering an expanding range of travel related products and services leveraging the distribution channel and other points of customer interaction

20

Defining Ancillary Revenues 

Frequent Flyer Programs 

Sale of points to third parties 



Sale of points for redemption 



Credit cards, other retailers, partner airlines

Top-up redemption levels

Variable redemption levels for unrestricted inventory 

Accelerated reduction of liability

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 21

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

22 Source: United States Government Accountability Office, July 2010

Ancillary Revenue as a % of Total Revenue 0.3% 0.3% 0.4% 0.5% 0.7% 1.0% 1.2% 1.3% 1.5% 2.2% 2.5% 3.2% 3.8% 4.0% 4.8% 5.2%

Austrian Iberia

PIA Pakistan Int. US Airways Air Berlin Frontier Air Arabia Qantas

6.7% 7.3% 7.4% 7.9% 7.9%

Jazeera Airways Delta AirAsia

8.9% 9.1% 9.3% 9.6% 9.8% 10.3% 11.0%

American Flybe Aer Lingus

13.0% 14.1% 14.8% 15.5%

Vueling easyjet

19.3% Allegiant

22.7% 0%

5%

10%

15%

20%

25% 23

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

Ancillary Revenue in Euros per Passenger Southwest Austrian Finnair LAN Airlines Iberia Royal Jordanian PIA Pakistan Int. US Airways Air Berlin Frontier South African WestJet AirAsia Air Arabia Norwegian TAM Airlines SkyEurope Jazeera Airways AirTran Alaskan Airlines Flybe easyjet Emirates Germanwings Vueling Ryanair Qantas JetBlue Delta Jet2.com American Aer Lingus United Allegiant

€ 0.00

€ 0.62 € 0.77 € 0.85 € 0.90 € 0.91 € 1.16 € 1.49 € 1.97 € 2.63 € 2.78 € 3.78 € 4.15 € 4.18 € 4.84 € 5.68 € 6.13 € 6.64 € 6.68 € 7.10 € 7.61 € 8.13 € 9.08 € 9.76 € 10.00 € 10.55 € 10.84 € 11.87 € 11.98 € 12.58 € 14.28 € 14.75 € 14.97 € 17.14 € 20.00 € 5.00

€ 10.00

€ 15.00

€ 20.00

€ 25.00 24

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

Defining Ancillary Revenue Top 5 Airlines’ Performance Top 5 Airlines - Ancillary per Passenger Annual Results 2009 Carrier Euros/ Passenger Allegiant 20.00 € United 17.14 € Air Lingus 14.97 € American 14.75 € Jet2.Com 14.28 €

Annual Results 2008 Carrier Euros/ Passenger Allegiant 9.95 € Vueling 9.55 € Ryanair 8.52 € Aer Lingus 7.35 € LTU 7.17 €



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

Top 5 Airlines - Ancillary Revenue % of Total Revenue Annual Results 2009 Carrier % Total Revenue Allegiant 22.7% Ryanair 19.3% easyJet 15.5% Jet2.Com 14.8% Vueling 14.1%

Annual Results 2008 Carrier % Total Revenue Ryanair 16.2% Vueling 14.2% Allegiant 12.8% Air Decan 9.0% easyJet 8.8%

Source: 2009 Guide to Ancilla ry Revenue a nd a la Ca rte Pricing by Idea Works

25

Defining Ancillary Revenues Revenue by Product Type Ancillary Revenue by Product Type Product Type

Checked Baggage

Early Boarding Reserved Seating

Frequent Flier Programs

Buy-on-board Travel Insurance

Sample Results (2008/2009 Annualized) Carrier Revenue per Passenger (Euros) United Airlines 4.36 Frontier 4.06 easyJet 3.56 Southwest 0.68 easyJet 0.50 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 Air Asia 2.06 easyJet 0.62

Source: 2009 Guide to Ancilla ry Revenue a nd a la Ca rte Pricing by Idea Works



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

Defining Ancillary Revenues Airline Benchmarks Carriers Aer Lingus Air Arabia Air Berlin Air Asia AirTran Alaska Airlines Allegiant Air American Austrian easyJet Delta Emirates Finnair Flybe Frontier Germanwings Iberia Jazeera Airways Jet2.com JetBlue LAN Airlines Northwest Norwegian PIA Pakistan Int. Qantas Royal Jordanian Ryanair SkyEurope South African Southwest TAM Airlines United US Airways Vueling WestJet

Ancillary Revenue in Euros $149,700,000 $17,220,000 $75,100,000 $49,310,520 $174,750,000 $184,275,000 $85,968,750 $1,650,000,000 $8,200,000 $396,468,000 $1,125,000,000 $207,298,140 $7,000,000 $56,916,000 $33,276,750 $80,000,000 $26,000,000 $9,331,002 $52,845,480 $249,000,000 $11,929,500 $131,250,000 $51,924,208 $8,373,753 $458,622,000 $8,897,040 $625,350,240 $24,971,000 $28,122,000 $54,750,000 $184,888,900 $1,200,000,000 $123,750,000 $62,103,000 $59,334,000

As % of Total Revenue 11.0% 4.0% 2.2% 8.9% 9.1% 6.7% 22.7% 9.3% 0.3% 15.5% 6.6% 2.5% 0.3% 9.8% 3.2% 13.0% 0.5% 7.3% 14.8% 9.8% 0.4% 1.3% 7.4% 1.0% 5.2% 1.2% 19.3% 9.6% 1.5% 0.7% 4.8% 7.9% 1.3% 14.1% 3.8%

Euros per Passenger $14.97 $4.84 $2.63 $4.18 $7.10 $7.61 $20.00 $14.75 $0.77 $9.08 $10.61 $9.76 $0.85 $8.13 $2.78 $10.00 $0.91 $6.68 $14.28 $11.36 $0.90 $1.97 $5.68 $1.49 $11.87 $1.16 $10.84 $6.64 $3.78 $0.62 $6.13 $17.14 $1.97 $10.55 $4.15

Region Europe and Russia Middle East and Africa Europe and Russia Asia and the South Pacific The Americas The Americas The Americas The Americas Europe and Russia Europe and Russia The Americas Middle East and Africa Europe and Russia Europe and Russia The Americas Europe and Russia Europe and Russia Middle East and Africa Europe and Russia The Americas The Americas The Americas Europe and Russia Asia and the South Pacific Asia and the South Pacific Middle East and Africa Europe and Russia Europe and Russia Middle East and Africa The Americas The Americas The Americas The Americas Europe and Russia The Americas

Airlines Posting Ancillary Revenue Results For most recent full-year period, listed in alphabetical order

The Guide to Ancillary Revenue and a la Carte Pricing by IdeaWorks Š 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 27

Case Studies: Frontier 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 28

Case Studies: Frontier (continued) 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 29

Case Studies: Frontier (continued)

30

Ryanair ! 





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 ! 

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 and RM Process and Tools

Pricing Systems Pricing Structures and Strategies

Inventory And Price Availability Optimization

A review of current practices, objectives and tools as a base for understanding the relevance of ancillary revenues

Reservation System Controls

Revenue Management Decision Support

Availability Processor

Airline Booking Engine

35

Pricing Process and Tools Traditional Pricing Process Definition of pricing structure and strategy

 Core fare level and range.  Fare rules and restrictions consistent with carrier model  Position versus competitors and service quality  Historical market performance

Publishing of fares

 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

Monitoring of market responses

 Evaluation of load factors, advance bookings, yield, traffic mix

Monitor competitors’ published fares

 Pricing systems monitor published competitive fares  Airline sales provided input on competitors private fares  Monitoring of competitor websites (manual, robotic, 3rd party)

Respond to market and competitive actions

 Determine market need  Review competitive positioning  Define pricing action  Determine distribution channels  Publish fares/ discontinue fares

36

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 Reservation System Schedule, booking (PNR) and blight closeout data

Revenue Management Forecaster Price elasticity data

Competitive share information

Class authorization/ availability or bid-price details

Forecast demand by fare level, leg, segment or OD

Availability request Bid-price curve

Revenue Management Optimizer

Availability Process

Fare Information

Fare Information

Revenue Accounting

Availability status

Fare Management System 38

Revenue Management Process and Tools 

Reservation System 

Remains the prime source of booking information from which RM forecaster generates demand estimate 



Provides mechanism for implementation of RM controls 



Flight level or PNR level data

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 Customer Valuation

Product Unbundling and Demand Elasticity

Making better pricing and revenue management decisions based on the true customer value

Information Needs and Understanding Customer Behaviour

Impact on Control Systems

44

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 postpurchase charges versus price increases 



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



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

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

Economic theory and anecdotal evidence strongly support the case for product unbundling 46

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

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

50

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

Revenue Management decision strategies should be based on direct passenger fees and not on the indirect revenues 52

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

Contemporary Revenue Management systems provide more tools to enable the recognition of ancillary revenue potential in the revenue management decision criteria

53

Revenue Management and Ancillary Revenues Average Fare Adjustment Matrix Leg or Segment Revenue Management Control Route H K YVR-YYC € 9.10 € 8.00 YVR-YWG € 12.50 € 10.20 YVR-YYZ € 11.30 € 10.30 YVR-LHR € 13.00 € 14.00 … …

Booking Class N B V U Q € 13.40 € 9.40 € 7.10 € 12.00 € 12.80 € 10.10 € 10.30 € 9.10 € 8.30 € 7.90 € 12.70 € 12.80 € 12.20 € 7.80 € 11.90 € 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 54

Revenue Management and Ancillary Revenues Average Fare Adjustment Matrix OD Control with Availability Processor Route

Point of Sale YVR-YYC YVR YVR-YWG YVR YVR-YYZ YYZ YVR-LHR LHR … …

Day Of Party Booking Class Week Size H K N B V U Q Weekday 1 € 9.10 € 8.00 € 13.40 € 9.40 € 7.10 € 12.00 € 12.80 Weekday 2 € 12.50 € 10.20 € 10.10 € 10.30 € 9.10 € 8.30 € 7.90 Weekday 3 € 11.30 € 10.30 € 12.70 € 12.80 € 12.20 € 7.80 € 11.90 Weekend 4 € 13.00 € 14.00 € 9.80 € 14.00 € 13.60 € 10.60 € 13.90

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.

55

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 revenuepositive 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 revenues

56



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



Other 58

strategic transportation & tourism solutions

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