RM and pricing expert Michael Bentley shares his insights into how airlines are driving revenues and profits
As 2015 winds down and the holiday season gets into full swing, airlines are at a critical booking window. Indeed some of the highest profits are made by airlines during the holiday season. So let’s take a look at how some of the most successful are approaching pricing in a year that has seen record airline profits.
1. Understand consumer behaviour
When booking Thanksgiving air travel, consumers generally do one of two things. They either purchase tickets far in advance because it is a short, condensed holiday and they want to secure tickets for the precise time they want to travel. Or they wait for last-minute deals. However, if they wait, there is a risk, because the day before Thanksgiving is notoriously the busiest travel day of the year, and as capacity for that huge travel day dwindles, rates can go up. When it comes to the Christmas holiday, people typically commit much earlier to buying tickets. And although history shows us that consumer price sensitivity spikes during the Christmas holidays, airlines are less likely to lower prices.
2. Make smart offers to sell more
Consumers are increasingly looking for value-add products and bundled deals when purchasing airline tickets. Pitched correctly, these offers can incentivise consumers to purchase additional products and subtly drive loyalty.
One tactic is to understand that make the price differential between first class and coach smaller, allowing airlines to sell more first-class seats rather than give them away through loyalty programmes. They are also offering more seating options, like Economy-Plus on United and Delta’s Economy Comfort, that give flyers a better experience, even if they aren’t willing to spend the money in first class.
By doing better with ancillaries, airlines can increase profit margins and drive organic revenue growth.
Examples of airline ancillary services include:
- United Airlines currently offers a service where customers can pay a small fee at certain airports for ‘Premier Access’. They then receive dedicated airport check-in lines, exclusive security lanes at select airports, and priority boarding. Basically, they move a lot faster through the airport for a reasonable fee.
- United is also giving customers the opportunity to purchase reward miles that can be used toward reaching thresholds for elite status levels. Before this, customers could buy reward miles but it didn’t count toward these levels. Prior to the availability of these products, loyalty members would resort to end-of-year coast-to-coast flights to earn those last few miles needed to achieve status. These ancillary products offer them a much more convenient alternative.
- Delta has benefited from offering a variety of ancillaries. In 2013, the airline recorded the second-highest ancillary profits in the industry, which it derived from checked bags fees ($833m), purchase of SkyMiles ($960m), and an additional $635 million from purchases of preferred seats, in-flight Wifi, hotels, car rentals, trip insurance, SkyClub passes, the Lift package (which includes priority boarding and a mileage booster), and the Ascent package (which includes priority boarding and Wifi).
3. Focus on customer service
US-based airlines are doing a much better job on the customer service front. While they may lag service offerings aboard Asian carriers, they are updating their fleets, adding entertainment products, and focusing more on the experience in general. This has been a significant shift, especially at Delta Air Lines, which is now tops in customer satisfaction. The good news is that they can charge a small premium for improved customer service experience, and passengers are willing to pay it.
4. Bundle dynamically and leverage data
Ancillary bundling is one thing but dynamic bundling is another. Instead of offering static bundles that never change, airlines present only the most relevant packages to each traveller. As such, each package will be personalised for the customer or the behavioural segment they fall into for each trip. So a businessman or woman taking an overnight trip will be offered a different package to when they are travelling with their family of four week long holiday.
It goes without saying that airlines have a wealth of rich data. By leveraging this valuable historical data, they will be able to determine which product bundles will result in the highest likelihood of purchase and at a price that results in incremental profit. They already know that targeting consumers with personally relevant offers is the most surefire way of securing purchases. Dynamic bundling will only increase their ability to target their passengers with the product combinations they want, thereby driving organic revenue growth and improved customer lifetime value.