It’s not often that I hear the phrases Ancillary Revenue and Revenue Management used in the same conversation, so it was interesting at first to see the term ancillary revenue used in the short announcement yesterday on JetBlue Airways appointing the former Amercian Airlines and more recently United Airlines executive Dennis Corrigan to serve as vice president of revenue management. But reading a little further the reference to ancillary revenue is more related to the former head of revenue management, Richard Zeni, moving to manage JetBlue’s migration from Navitaire to SabreSonic, in part to ”expand ancillary revenue opportunities and enable other selling opportunities largely not allowed through Navitaire.” That last phrase could warrant a blog post in itself, but my focus today is really on whether people working in Airline Revenue Management should be conscious of ancillary revenue, or whether their job is just to maximize ticket revenue? Take a look at below at two opposing points of view:
Firstly, US Airways President, Scott Kirby from a Q4 2008 earnings call held on January 29, 2009. Text is from Seeking Alpha.
William Green – Morgan Stanley
How do you think about then the tradeoff between load and ancillary? Is there a metric that you try to watch or, obviously you don’t want to give away too much fare to get people on to pay ancillary, but to some extent if ancillary were stickier than maybe there is something to that?
We don’t think about it as a tradeoff. We try to maximize passenger revenue and ancillary revenue comes in as it comes in, but we’re defiantly trying to just maximize passenger revenue. In this environment right now with the pricing as is, that means we’re running higher load factors which we do get some benefit on the ancillary side. But left to our own devices, we would have a firmer pricing environment and slightly lower load factors and higher yields.
And secondly, Ponder Harrison – Managing Director Marketing & Sales at Allegiant in October 2008:
This is our second consecutive quarter of 90% or better load factor production. When compared against all US domestic reporting carriers, Allegiant has been number one in load factor for all three quarters in 2008. When each passenger is worth over $30 in ancillary we’re obviously heavily incented to fill the aircraft.
And more from Allegiant.
Jim Parker – Raymond James
And you’re suggesting that the ancillary, that there’s no softness there.
You know to date we’ve not seen it. I guess we’ve had a sequential increase every quarter. Certainly this quarter on a sequential basis was perhaps not as high on an absolute level as we’ve seen on a per passenger basis going back historically but we did increase convenience charges on January 1st. We have also begun to probably more aggressively revenue manage both our web and our airport bag activities. We continue to make very good gains with the assigned seat program, what we call our premium-seating program.
I am convinced that with ancillary revenue becoming more and more important for airlines, that revenue management departments ignoring this will do so at their own peril. Not only does an airline need to look at the seat revenue when looking at ideal load factors; in future, the raft of a la carte fees should not be considered fixed, but should be revenue managed in a similar way that airline seats are today. On one hand this is good news for people working in Revenue Management as it means their importance to the airline could be even greater in future, but on the other hand, it could indicate a changing of the guard if existing people in this role are too slow to understand the new airline pricing environment.