With jetBlue caving in to pressure and introducing ancillary fees, Tom Bacon wonders whether it will bring anything new to the table

Since bag fees were introduced by most of its competitors seven years ago, New York-based maverick airline jetBlue has resisted this ancillary strategy. Now, in response to pressures from Wall Street to improve revenue performance, jetBlue, has had to change tack.

However, to make the fees more palatable to its most loyal customers – and to its maverick brand image – it is simultaneously launching its own version of ‘branded fares’; customers will be able to choose between a no-frills fare and bag-included bundles of service attributes. 

Frontier Airlines was the first to offer branded fares in the US, seven years ago now, and American Airlines launched their version a few years later.

Interestingly, jetBlue has announced that its version of branded fares, unlike those of Frontier or American, will entail ‘dynamic pricing’. They will not have a set fare premium for the pre-packaged bundles, but instead will vary the premium based on demand.

Although this sounds revolutionary in the US, most international airlines with branded fares already do something similar. jetBlue has not elaborated on its concept so it may not, in fact, match what the international airlines offer but let me contrast the existing two versions of branded fares:

1.        Fixed premiums: In the case of American and Frontier, there is a fixed premium for the pre-packaged extra services. A bag, a drink and expedited boarding may be bundled for an extra $30 above the lowest available no-frills fare. For these airlines, customers can easily compare the pre-packaged bundles to a la carte pricing for similar services and decide whether the bundle makes sense for them. The implicit assumption is that every customer is an opportunity for sell-up. With this pricing philosophy at Frontier, we quickly got a third of our passengers to ‘buy up’ when offered a choice.

2.       Dynamic premiums: At most international carriers, the premium for a bundle versus a no-frills fare varies with demand. The bundled fares are mapped into the higher tiers in a revenue management pricing hierarchy and given greater availability than their no-frills brethren. The implicit assumption is that customer demand can be segmented between a no-frills fare and the bundled fares. So, just like airlines today forecast 30-day advanced purchase customers vs. 14-day advanced purchase demand, three-day demand and walk-up demand, airlines should segment between a no-frills passenger and a passenger demanding a bundle of ancillary services.

In the latter approach, as a particular flight fills up and the booking occurs closer to the date of departure, the no-frills fare increases (the lowest fare buckets get closed off).  Since all of the bundled fares are still available, the premium for an upsell between a no-frills fare and the first bundled fare falls. A customer might, 30 days out, have a choice of a $99 no-frills fare and a $179 bundle; when the $99 fare is sold out, the comparison changes to $119 versus $179 and, potentially, eventually, the customer sees a $40 sell-up ($139 versus $179). The premium for the bundle is ‘dynamically’ managed, large at first and narrowing as the lowest fares are sold out.

Seven years ago when we launched branded fares at Frontier, the revenue management academicians all supported that latter approach. So it’s no wonder that it is actually more common globally than the first approach. Such ‘dynamic’ pricing, however, may not be well suited to jetBlue – there are definite trade-offs. Here are some concerns:

• ‘Dynamic’ pricing requires the airline to predict the unique demand for each branded fare.  With most RM systems facing forecasting challenges as it is, this further complicates the process and potentially introduces new errors.  One airline I worked at discovered that its sophisticated revenue management system simply could not handle its version of ‘dynamic’ branded fares.
• It is more difficult for customers to compare branded bundles against a la carte pricing.  Customers will be more attracted to the upsell when the lowest no-frills fares are sold out - and the premium to the first upsell is smallest.  In some markets, this is the opposite of what most RM experts would recommend – the question raised is: wouldn’t price elasticity argue for a larger upsell premium as the lowest fare buckets close?
• The customer, in fact, loses choice.  When all of the low-frills buckets close, only the more expensive bundles will be offered.  Will everyone who books in the last two weeks want to check a bag?  Wouldn’t an airline do better by increasing the base fare as demand merits - and then separately charging a premium for extra services demanded by individual passengers?
• When the branded fares are dynamically managed as explained above, the first upsell premium – at least many days before the date of departure -- tends to be larger than if there is a set premium above the no-frills fare.  As jetBlue moves from not charging for bags to now charging for bags, a large premium will not mitigate the perceived negative impact of the introduction of new bag fees.  

Dynamically managed branded fares may be better suited for less competitive markets where the bundled fares target relatively price insensitive passengers. A fixed premium (that represents a discount vs. a la carte pricing), on the other hand, can help protect market share – probably important in jetBlue’s competitive situation.

We will soon see what jetBlue brings to the branded fare discussion. What does jetBlue mean by ‘dynamic’ pricing of branded fares? Will they match the current international airline convention or will they bring something totally new to the branded marketplace – a third version, if you will. 

Branded fares continue to grow in popularity but the industry is still adjusting their unique offerings to realise optimal results – and the optimum for one carrier is likely different from the optimum for another carrier. Although we must wait a bit longer to learn exactly what jetBlue has in mind, we should welcome their initiative as another industry experiment in the new world of ancillary and branded fares.

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

Questions? EmailTom or visit his website