A typical revenue management approach to vital ancillary streams is not in an airline’s best interests, writes Tom Bacon
If you ask the typical airline revenue manager to include bag fees in his objective of maximising passenger revenue, he is unlikely to do anything differently. He is forecasting demand for each flight for the next six to 12 months in $15-$50 fare increments – demand for $79 seats, demand for $99 seats, and so on – so an average revenue gain of $10-$15 from bag fees (50% probability x $25) doesn’t really change what he should do. He will continue to monitor demand, intervene when appropriate, and let the system allocate seats accordingly. Bag fees will be ‘gravy’.
For many carriers, ancillary revenue, excluding frequent flyer mileage sales, remains stubbornly under 10% of total revenue. As such, it doesn’t really move the dial on basic revenue management systems and processes. Although this is logical, it isn’t the way to grow ancillary revenue. On the other hand, when ancillary services total almost as much as the base fare – which is true for the leading ancillary carriers – focusing only on the base fare itself becomes misguided.
Any carrier that strives to increase its ancillary revenue needs to assign clear responsibility and dedicated resource to individual ancillary streams
One airline that approaches 40% in ancillary assigns ancillary revenue accountability to dedicated analysts separate from (base fare) revenue management. The bag revenue analyst’s job is to adjust bag fees by flight in response to demand – fees can vary from $15 to $50 and can increase as the flight fills up just as the base fare does. Bag revenue is treated as an independent revenue stream that needs to be maximised separate from the base fare.
This may represent an extreme approach but any carrier that strives to increase its ancillary revenue needs to assign clear responsibility and dedicated resource to individual ancillary streams. As with any new business, ancillary has special requirements. Lumping ancillary with an existing large complex business means the unique requirements will tend to get overlooked. Often, such new revenue streams need ‘an incubator’.
Tom Bacon has been in the business 25 years, as an airline veteran and now industry consultant in revenue optimisation. He leads audit teams for airline commercial activities including revenue management, scheduling and fleet planning. Questions? Email Tom or visit his website
October 2018, Las Vegas