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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