3 ways to incorporate airline ancillary fees in RM system allocations

Ancillary revenues are on the up and airlines increasingly need to incorporate fees in their RM forecasting and optimisation systems. Tom Bacon shares insights into how this can be done

Most systems, today, focus on the base fare and ignore ancillary fees as they allocate seats across fares. For example, a $79 fare is available to all passengers whether or not he is expected to check a bag and pay another $25.

Optimally, the ancillary profit stream should be forecast along with the base fare and explicitly included in the allocation of seats.  Of course, airlines can’t really offer a $79 fare and then change that base fare offering up or down based on whether the customer subsequently elects to check his bag.

But shouldn’t an airline set aside more seats for $79 passengers who check their bags versus $79 passengers who don’t? Will the market accept such new complexity?

If airlines decide to do so, there are basically three different ways to incorporate ancillary fees in RM system allocations.

1.  Filter based on ‘buckets’ (mostly AP)

Systems today analyse demand by ‘fare bucket’, which is a combination of fare levels and rules (full fares are generally in the highest value ‘bucket’).  The RM system compares the value of contiguous ‘fare buckets’ to determine the proper allocation of seats between them (a $50 difference in average fares gives more reason to wait for sell-up than a $20 difference). If we found that the $79 passenger, on average, drove only $22 in ancillary profits while the $99 passenger incurred, on average, $52 in ancillary, we would want to allocate seats based on an expected $50 differential ($101 versus $151) as opposed to the nominal $20 differential in base fares. 

2.  By Customer

Of course, if an airline actually had customer specific information it may instead choose to incorporate it in customer-specific availability. Could a $99 base fare be ‘more available’ to the customer inclined to buy the big seat and check his bag? Airlines could identify the passenger on their websites (via sign-in’s to their loyalty program, for example), and then source the historic propensity to purchase ancillary services, and adjust base fare availability accordingly. IATA’s (International Air Transport Association) proposed  ‘New Distribution Capability’ would likewise theoretically accommodate this through third party distributors. Of course, this could be interpreted by customers as even more ‘unfair’ than current pricing practices, which many already dislike.

3.  By segment/geography/channel

In between #1 and #2 above, an airline could develop a more sophisticated model for ancillary without going all the way to ‘customer-specific’. Certain segments could drive higher ancillary. Just as fares themselves are higher in business markets, there may be a higher propensity to buy big seats and expedited boarding in such markets. Before NDC is fully implemented – and ancillary fees become more available on third-party websites – one might expect more ancillary purchases to occur on the airline direct channel and therefore an even greater incentive for low fare availability on their websites (assuming ‘full content’ rules permit them; ‘full content’ refers to some third-party channels requirement that airlines must offer the lowest fares available in any channel on their sites).

Increasingly, revenue management becomes a multi-departmental process, requiring integration of pricing, marketing, loyalty, CRM, and distribution

Whether airlines adopt alternatives #2 or #3 (customer-specific or market segment-based availability), total revenue management brings together RM and customer relationship management (CRM). Increasingly, revenue management becomes a multi-departmental process, requiring integration of pricing, marketing, loyalty, CRM, and distribution.

In fact, airlines and hotels already account for ‘total revenue’ in evaluating group travel. Many groups have special needs – potential name changes for the airline, meeting space at hotels – that need to be incorporated in addition to the base fare in a complete assessment of potential profitability.

In conclusion

Moving to total revenue management is inevitable as ancillary revenue grows. Although a customer-specific approach may be optimal, airlines will likely initially apply some kind of segmentation (by booking class or otherwise) as a way to partially adjust for potential ancillary profitability.

Tom Bacon is a 25-year airline veteran and industry consultant in revenue optimisation. 

Questions? Contact Tom at tom.bacon@yahoo.com or visit his website http://makeairlineprofitssoar.wordpress.com/. His views are his own.

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