Pricing it right is something all airlines struggle with but guest columnist Tom Bacon believes the best thing revenue managers can do is keep it simple.

Many travel experts have celebrated American’s new branded fares – rebundling product features that in the new world of airline ancillary most airlines offer a la carte.   The new bundles can provide effectively ‘customised’ fares to different market segments or, at the extreme end, individualised fares.

However, skilled revenue managers, who have not yet got their head around ancillary itself, have no idea how to now handle such branded fares. Why?

·         Airlines’ RM systems can’t properly account for the new bag fees and other ancillary revenue. There is no concept of ‘total revenue management’.

·         Re-bundling features and offering yet more fares in lieu of certain ancillary charges multiplies the fares airlines must file. Frontier Airlines’ introduction of branded fares in 2008 tripled the fares it filed.

Airline pricing, already considered much more complicated than pricing in other industries, just got more complicated!

Revenue management involves allocation of scarce aircraft seats across passengers of varying value to the airline or, in other words, ensuring the highest paying passengers get access to the seats. We use sophisticated systems that forecast and trade-off passenger demand at different fares ($75 vs $100) and across different origin & destination routes (O&D’s) - the ‘local’ passenger versus the passenger connecting to the Hong Kong flight). We try to make sure that if the plane is full we favour the $100 fare over the $75 fare and the Hong Kong O&D versus the connection to Wichita.

And branded fares represent another opportunity for sophisticated forecasting and optimisation. Shouldn’t we now forecast how many people will pay the extra $30 for a re-bundled fare? Shouldn’t we measure the elasticity of demand for the new fare?  Should we distinguish in our system between passengers who buy the no-frills fare and the ‘upsell’?

In short, no. I don’t think so.

Although branded fares do represent a kind of ‘upsell’ for the airline – a higher fare than the base, no-frills, fare - they are not necessarily ‘more revenue’ for the purposes of revenue management. When the airline bundles two free bags, no change fee and free video on the plane into the fare, and charges an extra $30, they may not be receiving any actual incremental revenue above what they would have received from the passenger in the a la carte world. In fact, pricing for bundled fares provides a discount on the bundle to make it attractive for the passenger – the traveller is actually paying less in many situations.

A focus on Frontier

In acknowledgement of this feature of pricing for branded fares, Frontier Airlines, the first US airline to offer such re-bundled fares two years before American, does not account for the fare differences in its revenue management of bundled fares. I was in charge of pricing and revenue management at Frontier during the launch and first year of the fares. We made the no-frills fare and the new bundled fares equally available in our revenue management system - we treated them of equivalent value. Even today, if you explore travel options from Denver to Los Angeles on Frontier’s website you will see three fares for each service and all are available all of the time. As demand increases and seat availability falls, each of the fares increase in tandem, always with the same target fare difference (for example $30) between branded products. Not only is this RM approach consistent with Frontier’s view of the value of branded fares in the system but it also reinforces the notion of ‘passenger choice’ in its marketing of the fares. Frontier passengers can truly ‘have it their way’ for each flight in every circumstance – Frontier doesn’t black out certain bundles at certain times nor does it increase the fare premium on peak days, for example.

Of course, this approach is also attractive to Frontier because it is simple from a management standpoint. The revenue managers and the revenue management system are not asked to do anything new or different as they manage the new branded fares product offering.  Airline revenue management is already complicated enough without new complexity associated with the new branded fares.

Although I believe one could prove, theoretically, that Frontier is leaving money on the table by ignoring branded fares in its revenue management protocol (and some academic studies say exactly that), I do not believe it is doing so in practice. On a recent project with a major airline revenue management provider flight forecast accuracy improved dramatically when we reverted from forecasting each distinct fare bucket to forecasting fares at a more aggregate level. Forecasting too granularly can actually diminish forecast accuracy. Forecasting and optimisation of branded fares assumes we can gain precision that is not possible in the real world of dynamic demand, multiple O&D’s on any single flight, changing competition, and…new ancillary fees. So to all RM system managers who are now confronting branded fares, the trick is to ‘keep it simple’.

Tom Bacon is a former airline executive and industry consultant in revenue optimisation. His views are his own. Questions? Contact Tom at tom.bacon@yahoo.com