As much as I try to keep this blog as industry specific and as unbiased as possible, sometimes I have a momentary lapse. But today is not that day, as I plan to reference positively the functionality of a competitor product. Before I start, let me set the scene. On a dark and stormy night back in April 2009 I wrote
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.
Since then I’ve been reasonably quiet on JetBlue with the obvious exception of being very impressed with the edgy attitude coming across in their blogging efforts. Today though, I’m more focused on a comment made recently by JetBlue CEO David Barger
I’m sure we will see much more of this revenue management of ancillaries in the months and years ahead. Only last week I was talking to a colleague who was looking at some very innovative ideas behind linking customer data to revenue management to website personalization and more, so there are definitely some extremely interesting things happening in this space at the moment. The opportunity is massive, the upside for airlines is obvious, and the downside from negative customer perception is minimal to zero if the process is well managed. Think about it: who complains about revenue management of airfares in order to maximize airline revenue, but unfortunately the same cannot be said about checked bag fees - a point that Southwest has used nicely to their advantage.
August 1, 2010 at 3:37 pm
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August 1, 2010 at 5:42 pm
Call me Skeptical Scott. While I agree that Ancillary Revenues should and will be managed by revenue management principles, I don’t think the majority of ancillary revenues are yet helping airlines to be more profitable.
Here’s an excerpt from a recent post I wrote on this topic. The full article can be found at http://gillespie411.wordpress.com/2010/06/16/why-ancillary-revenues-dont-much-matter/#more-1131
If the airline’s total revenues go up, and fares went up, then it looks like AR helped grow the top line. But I’m skeptical. Let’s go back to that family with a $1,500 travel budget. If an airline was happy selling its tickets with free bags for $1,500, but then discovers that it could sell its seats for $1,500 and charge the family $100 for bags, then one of two things have happened.
Either A) the airline’s revenue management model was wrong, or B) the family’s economic options changed. Option A is unlikely. Revenue management is the heart of airline pricing. It’s been around for 20 years and is now a very sophisticated science. I’d be shocked if the airlines have suddenly discovered that by unbundling stuff, they can boost revenues by more than one percent.
So is it the changing economic options of the travelers? Yes, it has to be. If total airline revenues are going up, then the industry is benefiting from a combination of improved demand and reduced supply. It’s not because travelers woke up and said “OK, we’ll pay more to go to our destinations, now that we can buy menu-style.” (end quote)
Martin, if you know of any studies that rigorously analyze the economic impact of ancillary revenues, I’d love to read them. I may well be missing something here…just don’t yet see what it might be.
August 2, 2010 at 2:42 pm
Scott, thanks for the thought provoking comment. If you click the final link in this post, I think you’ll find something more along your line of thinking. Merchandising is a buzzword right now in the industry, and some people think it just means unbundling, but it really is a lot more than this. In my view a good merchandising strategy starts with proper differentiation of your fare families, and then it keeps going from there; then watch the ancillary revenue equate to incremental revenue.