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’.

The case for JetBlue

Take JetBlue. It has such an incubator for its investments in new travel ventures - JetBlue Technology Ventures. This is managed as a separate operation from Jetblue Airlines and is based in San Francisco, not New York, and is considered a way to cultivate entrepreneurialial ventures, not possible at airline HQ.

So, fittingly, JetBlue recently announced a new subsidiary, JetBlue Travel Products, that will be responsible for non-flight-related ancillary revenue including tour revenue, car/hotel revenue and trip insurance. Tour revenue has traditionally been treated uniquely by airlines, often with dedicated departments or business units. But car/hotel revenue and insurance are more often included in the responsibilities of e-commerce generally – and they have rarely received much true commercial attention. Although JetBlue doesn’t say, other ‘non-flight-related’ products could conceivably include events, ground transportation, city guides, and concierge services. JetBlue has hired an executive outside the airline industry - Andres Barry from Boston Consulting Group - to lead the subsidiary and has based it in Fort Lauderdale far from JetBlue’s headquarters. 

JetBlue recognises that key ancillary revenue streams need focus and accountability. Although they haven’t announced a subsidiary for bag fees, change fees, or inflight catering – which are more linked to the flight – their new subsidiary demonstrates that they are looking for growth in ancillary that isn’t possible in the current organisation.

Ed’s note: Check out this February interview with Christina Heggie, an investment principal at JetBlue Technology Ventures

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

EyeforTravel North America 2018

October 2018, Las Vegas

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